Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.
Establishing a brand, building a client base, and managing a workforce are all part of the learning curve that comes with going into business for yourself. But one aspect of running a business that few relish, is filing the company tax return.
Those accustomed to Pay as you Earn (PAYE) may find the prospect of managing their own taxes daunting. But whether you’re a self-employed freelancer filing your first sole trader tax return or a growing SME getting ready to file its corporation tax, a little forward planning and the right tools can make all the difference.
Here are 7 ways in which businesses of all shapes and sizes can take the stress out of their tax filing preparation.
1- Know which taxes apply to you
Managing your own tax can be intimidating, especially for nascent business owners. But there’s no fear like fear of the unknown. The better you understand your tax obligations, the less stressful business tax filing becomes.
The first step is understanding which tax liabilities your company faces. Remember that even if you run a side business you are still liable for tax on any income your business makes.
If your company is set up as a sole tradership, you pay a combination of income tax and National Insurance contributions (NIC) for each financial year. These are calculated together when you fill in your self-employed self-assessment. The financial year runs from the 6th of April to the 5th of April of the next calendar year. Your online tax return and any tax liability are due by the 31st of January of the following year. However, tax returns can be filed up until 28th February without incurring a penalty.
Self-employed sole traders also make payments towards the following year’s liability. This includes income tax and class 4 National Insurance contributions. These are divided into two instalments. The first of which is paid on 31st January and the second is paid on 31st July.
Like those who pay tax via PAYE, sole traders have a personal allowance for each year before their income becomes taxable. The following table represents the personal allowance and income tax bands for the 2022/23 financial year. These are the same as the 2021/22 thresholds and will remain frozen until the 2027/28 financial year.
£12,571 - £50,270
£50,271 - £150,000
Taxable allowances do not apply from sole trader income if you are running a side business. This is because your personal allowance is factored into your PAYE tax.
Sole traders also pay Class 2 & 4 rates of National Insurance depending on their profits. These are the HMRC bands and rates for 2022/23:
- If your profits are £6,725 or more, you are in Class 2
Class 2 must pay £3.15 per week.
- If your profits are £11,908 or more, you are in Class 4
- Class 4 must pay 9.73% on profits between £11,909 and £50,270 and an additional 2.73% on profits above £50,270.
- Class 4 must pay 9.73% on profits between £11,909 and £50,270 and an additional 2.73% on profits above £50,270.
Unlike sole traders, owners of limited companies do not pay income tax and NICs based on their profits. Instead, they contribute through the salaries they pay themselves and corporation tax. As well as being responsible for sending their limited company tax return, employers are also responsible for paying taxes on behalf of their employees.
The corporation tax rate is 19% for the 2022/23 financial year. This is paid on the company’s trading profits, investments and income from the selling of assets 9 months and 1 day after the end of the accounting period.
A company’s accounting period is usually the financial year. However, some companies set up 2 accounting periods per year. You can register to pay corporation tax here.
Find more information on how to file corporation tax, here.
As well as submitting a company tax return, limited company owners must also put through the PAYE system the salary they pay themselves. PAYE is designed to make it easier for business owners to pay a set contribution each month (or more frequently) on behalf of themselves and their employees.
Once you’ve decided on a salary for yourself and your team, your PAYE will calculate what you owe HMRC. Employers are responsible for ensuring that the correct amount of PAYE tax is paid to HMRC depending on each employee’s tax code.
Here’s how to get set up with PAYE
National Insurance contributions (NICs) on behalf of employees
Employers must make their own NICs as well as manage those of their employees. Each employee has their own category letter that dictates the rate they (and you) pay.
HMRC’s website has useful information on employer and employee NICs.
Many company owners pay themselves through dividends on top of their annual salary. These are also taxable, albeit at rates that are lower than income tax. These have been reduced since November 2022 and are currently as follows:
Basic-rate taxpayers pay 7.5%
Higher-rate taxpayers pay 32.5%
Additional-rate taxpayers pay 38.1%
Employers do not need to pay any tax on dividend income for the first £2,000 they receive.
Which? has created a handy calculator to help you work out how much tax you’ll need to pay on any dividends.
VAT registered sole traders and limited businesses
Sole traders and limited companies whose income exceeds £85,000 are obliged to register for VAT. Indeed, even companies whose income does not exceed this threshold may wish to register for VAT as it entitles them to reclaim the VAT on any business purchases they make.
VAT returns are usually submitted to HMRC every 3 months. Even if you have no VAT to pay or reclaim, you still have to complete a return.
Find out more about filing your VAT return here.
2- Use digital tools for easier bookkeeping
For years, digital tools have been available to take the legwork out of having to file a company tax return. Indeed, Making Tax Digital (MTD) is a nationwide initiative that will make it mandatory to use digital tools to prepare and submit business tax filing by 2026. Not only does this reduce the administrative time associated with preparing taxes, but it also reduces the propensity for error and unpleasant surprises like tax audits.
There are a host of digital tools on the market to help companies keep track of their income, track their expenses, manage their payroll and more.
A few of our top picks for the most intuitive and well-equipped bookkeeping platforms are:
*Xero: plans start at £14 pm
The increasingly widespread use of digital tools may explain why a record number of businesses filed their company tax returns on time in January 2023.
Built to save time and get you paid faster.
3- Update your records regularly
The thought of preparing your self-employed assessment or limited company tax return is especially nightmarish if you’re dealing with a whole financial year’s worth of records in one sitting. Even a self-employed freelancer whose books are fairly uncomplicated can spend many hours labouring on a spreadsheet flicking through invoices and rifling through envelopes stuffed with receipts. This is not a good use of anyone’s time. Instead, commit to updating records regularly as you go, so that it doesn’t become a colossal undertaking.
Again, there are digital tools to help you better organise and prepare necessary documents, copying them digitally, uploading them to the cloud and filing them away for future reference. In this way, it’s easier to keep track of:
Evidence of rent and maintenance costs (for those working from home)
Receipts for TAX-exempt expenses, such as travel or client entertainment
4- Keep track of expenses
Speaking of expenses, businesses can (and do) find themselves overpaying tax because they neglected to declare all of their expenses on their business tax return. Keeping physical receipts and stuffing them into an envelope throughout the financial year is a time-honoured way of failing to keep track of small business expenses.
Inevitably, physical receipts can get lost, or be misreported leading to accounting errors and potentially paying more tax than you should. Use a tool like Dext (formerly known as Receipt Bank) to keep track of physical and digital receipts. This will ensure that your income is always accurately offset by your expenses, reducing the risk of overpayment.
5- Remember your deadlines (and set funds aside accordingly)
Small business tax filing is much scarier when you don’t have a clear idea of how much you owe and when it is due. Keeping an eye on the calendar can make preparing your tax filings a lot less stressful, while also ensuring that you have sufficient funds set aside for the appropriate deadlines.
Here are some dates for self-employed sole traders to keep in mind:
31st January – Deadline for filing self-assessment tax returns and payments for the previous year
6th April – The first day a tax return for the previous financial year can be submitted
31st July – The second round of income tax and NI payments from the previous year are due
5th October – Deadline to register for self-assessment
It is recommended that sole traders submit their self-assessment tax returns as early as possible to ensure they have a clear idea of their liability due by the end of the next January. Many sole traders use the same bank account for their personal and business finances, making it easy to conflate the two. This brings the risk of spending income that should be set aside for tax. To be on the safe side, it is a good idea to put aside 20% of all income. While you may pay less than this depending on your expenses, remember that, depending on the payments made on the account, you may have to pay 150% of your tax liability in one lump sum.
For owners of limited companies, tax is easier to keep track of as it is deducted from their salaries on a PAYE basis. Keep in mind, however, that tax is due on dividends on the 31st of January after the financial year in which the dividends were distributed.
6- Stay in touch with HMRC
In these financially precarious times, many businesses have struggled to meet their tax obligations by the necessary deadlines. Insufficient cash flow, higher operational costs and reduced customs due to the economic recession have meant that many businesses share a sense of dread when submitting their company tax return.
However, the more proactive businesses are when dealing with HMRC, the more can be done to help. In most cases, a time-to-pay arrangement can be set up whereby businesses can pay whatever amount they are unable to cover by the due date over a predetermined time of up to 12 months.
HMRC also has lots of useful information to guide small businesses in managing their tax affairs. This can be sent via regular emails that businesses can subscribe to here.
7- Let Square remove the friction from your key business processes
With robust digital tools at their side, small businesses can spend less time on the administrative work needed to prepare their taxes. With Square, these benefits needn’t stop at tax preparation. Our powerful and affordable suite of software and hardware solutions can improve the overall running of businesses, aid operational efficiency and improve cash flow.
Make the most of Square’s business intelligence and run your company through Square Dashboard. Learn what makes your business tick with real-time sales reports and figures comparison.
Manage your entire business with the touch of a button. Send invoices, respond to feedback, create discounts on products, organise your team, oversee inventory details and more with Square.
Square Inventory Management helps you keep track of – and organise – your stock from anywhere. Even better, receive a stock alert when items are running low – so you’ll never disappoint your customers. Our platform is built for speed and efficiency, enabling you to spend more time face-to-face with your customers.
Empower your workers through clear and effective Team Management. Benefit from easy appointment scheduling, time-tracking and sales analytics.
Run all of this through Square’s powerful yet simple to use POS system. Manage all of your business needs in one place and join the two million businesses around the world that already use Square POS.