Tax returns at the end of the financial year, the most dreaded time of year for SMEs! It feels like we just did this, but April is getting closer by the day. The end of the financial year is never an easy time for small businesses.
Inevitably, the tax you do owe will come as a shock, and it’ll be a panic to try and get the right documents and money ready to pay. Without proper budgeting throughout the year, it may mean that your small business doesn’t have enough money to pay the tax you owe.
To ensure that you don’t face financial woes at the end of every tax year, setting money aside is essential. So, how much money should SMEs set aside for paying taxes?
Why set money aside?
Firstly, it is essential to set aside money for tax. If you are unable to pay your tax bill, HMRC will issue an automatic penalty of £100. If you cannot pay after three months, you’ll receive a further fine and so on for six months and twelve months afterwards. Paying tax on time can save you an unnecessary business expense, so it pays to be prepared year in and year out.
How much should I set aside?
As a general rule, it is wise to set aside 30% of every payment you receive. Every time you get paid for work, instantly take 30% of those funds and transfer it into a high-interest account. If your SME is paying a higher tax rate, then it is wise to move 50% of your SME earnings into a savings account so that you have all the money you need to cover your tax bill.
Yes, we know that this can really ‘sting,’ but better to face that pain now in small increments than later in one big blow!
So that you can keep on top of your savings for tax purposes, it may be wise to open an easy access account. This will still offer you interest but will ensure you can deposit money regularly so that your tax fund doesn’t deplete.
While you can find accounts that provide a better interest rate, these are often harder to deposit and withdraw money from if you do need to access the balance for other reasons.
Remember, you may not need all of your savings to fund for your tax bill, depending on how much tax relief you can claim as expenses. However, it is better to be safe than sorry when it comes to paying tax.
Want to learn more?
Subscribe to our newsletter to get accounting tips like this right to your inbox
About The Author
We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!