Best Way to Manage Tax Liabilities
Discussion
I started my own company six months ago and everything seems to be going OK. I am VAT registered and pay myself a nominal salary. However, as my bank account goes up I am acutely aware that I actually own a fair amount in tax (VAT, NI, income tax etc.) so my balance isn't an accurate indication of how much money I'm making.
Does anyone have any tips on how I can manage my cash and give myself a more realistic view of how much money I have in my business once my tax liabilities have been taken care of?
Does anyone have any tips on how I can manage my cash and give myself a more realistic view of how much money I have in my business once my tax liabilities have been taken care of?
CzechItOut said:
I started my own company six months ago and everything seems to be going OK. I am VAT registered and pay myself a nominal salary. However, as my bank account goes up I am acutely aware that I actually own a fair amount in tax (VAT, NI, income tax etc.) so my balance isn't an accurate indication of how much money I'm making.
You've been trading six months, and are VAT reg.Please tell me you've already done your VAT return once...
Golden rule (and one it took me a while to figure) - put all your figures into your accounts ASAP. Don't wait until the end of the VAT quarter or whatever. As soon as you get an invoice, as soon as you bill for a job, as soon as you get a bank statement... KEEP IT UP TO DATE. Then it's a doddle, and you don't have sweaty Sunday with the shoebox of receipts.
Most businesses will be paying their VAT on a three monthly basis. On that score, you should have completed one VAT return already and paid the VAT arising. The second VAT return should be coming due soon.
Have you any idea what the company's likely first year's net taxable profit will be. In other words, are you monitoring your profit situation? If you are, set aside 20% of the annual profit as being the likely Corporation Tax liability - which is payable 9 months after the end of the company's first 12 month trading period. This is probably being excessively cautious but it's best to over provide for a tax bill than under provide.
Is the company set up for PAYE? If not, you should do so because you are required to report the salary amount you are drawing from the company. You should do this even if there is no PAYE or NI arising on that salary.
Finally, if you are only drawing a small salary, would I be right in assuming that you plan to treat any additional amounts you take from the company as dividends. If so, you will need to register with HMRC so that you can report the dividends you have received and declare any Income Tax liabilities arising.
Have you got an accountant yet?
Have you any idea what the company's likely first year's net taxable profit will be. In other words, are you monitoring your profit situation? If you are, set aside 20% of the annual profit as being the likely Corporation Tax liability - which is payable 9 months after the end of the company's first 12 month trading period. This is probably being excessively cautious but it's best to over provide for a tax bill than under provide.
Is the company set up for PAYE? If not, you should do so because you are required to report the salary amount you are drawing from the company. You should do this even if there is no PAYE or NI arising on that salary.
Finally, if you are only drawing a small salary, would I be right in assuming that you plan to treat any additional amounts you take from the company as dividends. If so, you will need to register with HMRC so that you can report the dividends you have received and declare any Income Tax liabilities arising.
Have you got an accountant yet?
As well as running Xero to give me a good view of liabilities I have set up a separate tax account. I put all the VAT collected into this account but pay the VAT on purchases from my current account.
This ensures I always have the money to pay my VAT quarterly, as well as NI and a good chunk of my corporation tax. I'm no accountant though, so don't know if it's a good idea, but it works for me.
This ensures I always have the money to pay my VAT quarterly, as well as NI and a good chunk of my corporation tax. I'm no accountant though, so don't know if it's a good idea, but it works for me.
CzechItOut said:
I started my own company six months ago and everything seems to be going OK. I am VAT registered and pay myself a nominal salary. However, as my bank account goes up I am acutely aware that I actually own a fair amount in tax (VAT, NI, income tax etc.) so my balance isn't an accurate indication of how much money I'm making.
Does anyone have any tips on how I can manage my cash and give myself a more realistic view of how much money I have in my business once my tax liabilities have been taken care of?
If you need to ask you need a bookkeeper.Does anyone have any tips on how I can manage my cash and give myself a more realistic view of how much money I have in my business once my tax liabilities have been taken care of?
Thanks everyone for the very comprehensive replies, lots of food for thought. Just to try to answer some of the questions:
I become VAT registered in May, so have yet to produce my first return
I do have a spreadsheet, but the estimating profit is a great idea
I am registered for self-assessment
I do have an accountant and they process my payroll for me
I like the idea of having a separate account for tax purposes
I become VAT registered in May, so have yet to produce my first return
I do have a spreadsheet, but the estimating profit is a great idea
I am registered for self-assessment
I do have an accountant and they process my payroll for me
I like the idea of having a separate account for tax purposes
I'd heartily recommend getting set up on a decent online accounting package (FreeAgent, Xero, Crunch, are all good) rather than use a spreadsheet. This will give you an instant view of your tax liabilities at any given time (PAYE/NI, Corporation Tax, VAT) and make life easier for your accountant as well. There's no real need for a physically separate bank account*.
- although if you accumulate over the £85k FSCS compensation limit, splitting deposits between banks is a good idea!
deggles said:
I'd heartily recommend getting set up on a decent online accounting package (FreeAgent, Xero, Crunch, are all good) rather than use a spreadsheet. This will give you an instant view of your tax liabilities at any given time (PAYE/NI, Corporation Tax, VAT) and make life easier for your accountant as well. There's no real need for a physically separate bank account*.
I agree with this. Use an online accounts package.- although if you accumulate over the £85k FSCS compensation limit, splitting deposits between banks is a good idea!
Eric Mc said:
I presume they do more than that for you.
Did you ask them the question you asked here?
Yes, they have actually been very good. This was just a Friday afternoon thought that popped into my head, which I am sure they have far more important things to concern themselves with!Did you ask them the question you asked here?
k all interest but that's not the point, I just like keeping it aside so I know I've got it there. I've started to do the same for my personal tax liabilities too.CzechItOut said:
I started my own company six months ago and everything seems to be going OK. I am VAT registered and pay myself a nominal salary. However, as my bank account goes up I am acutely aware that I actually own a fair amount in tax (VAT, NI, income tax etc.) so my balance isn't an accurate indication of how much money I'm making.
Does anyone have any tips on how I can manage my cash and give myself a more realistic view of how much money I have in my business once my tax liabilities have been taken care of?
See the bold part ... Do you have a separate Business account, or are you using your account ?Does anyone have any tips on how I can manage my cash and give myself a more realistic view of how much money I have in my business once my tax liabilities have been taken care of?
Remember the Company as such is it's own identity/the Monies in it are not your own !!! If using your own - please setup a business account (Cater Allan/HSBC plenty of others out there) and separate your personal accounts from the Companies money.
As others have said - better get yourself an accountant initially as they can guide you through what is always a changing/evolving target (i.e. this years tax/vat/payroll may be completely different next year)
I've been Ltd for > 10 years - and while nobody enjoys spending profits on accountants, for me (and my wife ...) it's peace of mind that the money is where it needs to be/paid on time to whom/when it has to be.
Take a look on contractoruk (not just for contractors) It has lots of useful advise as to how to run your Ltd.
If cash flow is ok, then generally everything else will be ok.
Work out your ratios, wages as a percentage of sales, purchases as a percentage of sales etc. VAT is as its name: Value Added and shows what margin you are creating.
I have found fairly consistently that the business taxes I pay to HMRC are consistent at about 16% of turnover (Corp Tax, VAT & PAYE & NI) and my wage bill is around double that (I employ some part timers which reduces the amount of PAYE & NI)
It's amazing how these figures repeat over time, and when they don't, there's generally an obvious explanation such as capital expenditure
Work out your ratios, wages as a percentage of sales, purchases as a percentage of sales etc. VAT is as its name: Value Added and shows what margin you are creating.
I have found fairly consistently that the business taxes I pay to HMRC are consistent at about 16% of turnover (Corp Tax, VAT & PAYE & NI) and my wage bill is around double that (I employ some part timers which reduces the amount of PAYE & NI)
It's amazing how these figures repeat over time, and when they don't, there's generally an obvious explanation such as capital expenditure
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