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Income Tax and Your Small Business

By: Rachel Newcombe - Updated: 14 Jan 2013 | comments*Discuss
 
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When you’re running your own business, one task you have to get used to doing is handling your own income tax and completing self-assessment tax returns each year.

Being self-employed brings with it the joy of completing an annual self-assessment tax return. This lets the taxman know about all that you’ve earned in the last year. Once your tax return is completed, it’s sent to HM Revenue and Customs (HMRC) and the amount of income tax and Class 4 National Insurance contributions you need to pay is worked out.

In order to complete the self-assessment tax form, you need to keep accurate records throughout the year of all your incomings and outgoings. This is one very good reason why it’s important to be organised and develop an efficient filing system for all your receipts, as well as record details of expenditure and everything you’ve earned as you go along. If you’re not quite so organised, you could find yourself with a pile of receipts to sort out or months worth of records to input at the end of the year, which isn’t fun.

Completing the tax return is allegedly straightforward, but not everyone finds it easy or enjoyable. Hiring an accountant, who’s specialised in this area and lives and breathes figures, is a good idea if you’re not keen on doing it yourself. You may well enjoy the feeling of being able to hand over the job to someone else, plus it can take away some of the stress and worry about getting it all done in time. It’s not an excuse for not keeping accurate or up-to-date records though, as it will make things a lot easier if you’re able to hand over organised records to your accountant. They probably won’t be so enamoured to receive envelopes stuffed randomly with disorganised receipts, for example!

Paying Income Tax

When the tax return has been submitted to the HMRC, they’ll work out how much income tax you need to pay for your business earnings in the year concerned. They’ll also make a prediction, based on your current earnings, about how much tax you’re likely to need to pay in the following year.

This means that, come January, you’ll need to pay a chunk of your tax for the year just gone, plus more on account for the next year; subsequent payments are due in July each year. This can come as a shock to some small businesses, especially if they’ve not put any money aside to help pay for this. If the HMRC have the prediction for your next year’s earnings and tax wrong, then they’ll either refund the difference at a later stage or you’ll have to pay the extra at a later date.

One way of handling paying your tax and ensuring you’ve always got enough funds at the ready is to get into the habit of regularly putting aside a proportion of your earnings. If you put one third, for example, then you’ll be fully covered. The money you’re saving can go into a high interest account, where you’ll earn a good rate of interest on it. Do remember to pay your tax on time. There are a variety of methods you can use these days to make it quick and easy, otherwise you could be in line for a late payment fine.

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