Tax Planning and Income Tax
It is of vital importance that you make allowances for tax when working out your finances. It is a tax that has to be paid, yet many small businesses and self-employed people forget about in their first year. It is true that to begin with you may not fall in the tax bracket, not until the second or third year. However, if you allow for it from the beginning you won't get a nasty shock at the end of your first year when your tax returns are submitted and you are presented with a rather heavy tax bill.
When you are starting up it is easy to get carried away in the moment and forget about the finance side of the business. We are all guilty of overlooking tax or hoping we don't have to pay, but the reality of it is that if you don't pay you face a heavy fine or even a prison sentence.
AccountantsEvery small business needs an accountant. They are not cheap but the advice they offer could save you hundreds, possibly even thousands as you grow, in income tax payments. They will tell you what expenses are deductable and what you can claim a proportion of against tax. You must keep all your receipts and utility bills connected with your business no matter how insignificant they may seem as every penny connected with your business is tax deductable. In your first year your equipment is also allowable against tax to a limit of £50,000. There is also a wealth of tax advantages available to small businesses but you need to know what they are and apply for them, you won't automatically be given them. Talk to your accountant, or a financial adviser, who will help you to cut your tax bill by as much a possible.
Your accountant will also help you to maintain your books ready for the end of tax year inspection. It is at this point that you will receive your tax bill. You will also be given a payment plan, which is normally divided into three payments. Again, your accountant will be able to help you with this, and any other queries you may have, as will your local tax office.
The BasicsTax for self-employed people is different to those who are employed by companies. Instead you pay tax on the profits your business has made and not your personal income. The government provides a wealth of information for those setting up a business on their website. It answers a lot of the questions that people going self-employed usually ask. You can also get information from your local business Link Centre or your local tax office or job centre (who may be able to advise you of any start-up grants).
Tax doesn't have to be scary. If you plan for it, make all the deductions you can along with applying for all the tax benefits you're entitled to, it can be relatively easy. However, as with all things in life, it works best if you plan for it. Starting make tax provisions immediately and keep accurate records, it will make working out your taxes a lot easier for you and your accountant.