This article is intended to offer helpful guidance and does not constitute qualified financial or tax advice. Please consult an accountant or financial advisor if you have any questions pertaining to your business and note that all tax rates referenced in this article are subject to change, so make sure you keep up to date with HMRC announcements
Filing taxes might be one of the least enjoyable responsibilities of being a business owner. We all know what happens when tax returns contain mistakes or get filed late, but it’s still not uncommon for businesses to leave their tax filing preparation until the last minute. This year, HMRC reported that over two million people failed to meet their self-assessment tax return deadline.
Sometimes things have to be done at the last minute, of course — that’s the reality when you don’t have dedicated accounts and operations teams. But when it comes to the preparation part of filing your taxes, you can still be forward-looking and organised when you’re time-poor. We want to make tax filing easier for your business, so we’ve come up with some simple ways to do it ahead of next year’s deadlines.
1. Know your taxes
One of the most confusing things to work out — especially when you start a business for the first time — is which taxes you’re expected to pay, when and how. Here are some key ones to mark on your calendar.
For sole traders
ole traders pay income tax and National Insurance contributions (NICs) to HMRC each tax year running April 6th to April 5th. Both are calculated together when you file your tax return, in addition to any student loan repayments. If you planned to do a paper tax return, the deadline was 31st October 2021. If you’ve missed this date, you’ll most likely face a penalty fine. Online tax returns were due 31st January 2022 – but you can submit up to the 28th February 2022 without a penalty.
The table below shows what income tax rates you’ll be paying for the financial year 2021/22, based on HMRC’s latest changes to its tax bands.
|Basic rate||£12,571 - £50,270||20%|
|Higher rate||£50,271 - £150,000||40%|
National Insurance contributions (NICs)
- If your profits are £6,515 or higher, you’re in Class 2.
- If your profits are £9,569 or higher, you’re in Class 4.
- Class 2 must pay £3.05 per week.
- Class 4 must pay 9% on profits of £9,569 to £50,270 and 2% on profits above £50,270.
For limited businesses
Unlike sole traders, limited businesses don’t pay income tax and NICs based exclusively on profits. Instead, you’ll contribute via the salary you pay yourself, and through corporation tax. If you employ a team, you’re also responsible for paying tax on behalf of those staff. Here’s a breakdown.
The current corporation tax rate is 19%. It’s paid on your business’s trading profits, investments and the selling of assets 9 months and 1 day after the end of your accounting period. As HMRC point out: “Your accounting period is usually your financial year, but you may have 2 accounting periods in the year you set up your company”. You can register to pay corporation tax here.
Find more information on how to pay your corporation tax here.
Whilst sole traders pay income tax based on the profits they make, limited business owners contribute through the PAYE system based on their salary. PAYE (Pay As You Earn) is designed to make it easier for you to pay a set contribution each month (or more frequently) on behalf of yourself and your employees. Once you’ve decided on your salary and the wages of your employees, your PAYE will calculate what’s owed HMRC.
Here’s how to get set up with PAYE.
National Insurance contributions (NICs) on behalf of employees
If you have employees, their National Insurance is paid in two contributions: one, from their pay, and two, from you as their employer. Each employee will have their own category letter which dictates which rate they (and you) pay.
Check out HMRC’s website for more information on employer and employee NICs.
You may choose to pay yourself through dividends, which are also taxable.
Which? Have created a handy calculator to help you work out how much tax you’ll need to pay on any dividends.
For sole traders and limited businesses
For VAT-registered sole traders and limited businesses, 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. Simplify your bookkeeping
Shelves of books and binders are no longer necessary tools for tax filing preparation. You now have access to a number of online platforms that do the bulk of the hard work — in some cases, including even submitting your self-assessment. For the most part, the things that are left up to you are uploading bank statements and receipts, creating invoices and making sure you keep track of the hours you work. The tricky tax calculations are taken care of.
A few of our top picks for the most intuitive and well-equipped bookkeeping platforms are:
- Xero: plans start at £12 pm
- Zoho Books: plans start from £12 pm
- Freeagent: plans start from £9.50 pm
The range of features on offer (and how much you pay for them) can vary massively, so it’s worth thoroughly comparing the benefits of each platform before you get locked into any memberships. You can see which bookkeeping platforms Square integrates with here.
Software can significantly reduce the time and cost involved in the bookkeeping process, but if you’re unsure about your records, get a tax professional to take a look — even if it’s just a one-off.
3. Stay on top of your records
When managing your bookkeeping digitally, it’s still your responsibility to keep business records up-to-date for your tax filing preparation. Rather than leaving this until the very last minute, set aside one day a month (or more, if possible) to collect:
- Bank statements
- Evidence of rent and maintenance costs (if you work from home)
- Receipts for TAX-exempt expenses, such as travel or client entertainment
Get everything uploaded and digitally filed on the day you set aside. And if you’d rather stick to paper bookkeeping, make sure all of these are gathered and filed in (marked) date order in a safe place.
4. Set aside tax money
If you’re paying yourself through your company’s PAYE system on a weekly, bi-monthly or monthly basis, it shouldn’t be too hard to manage your finances and set aside tax money for each due payment.
For sole traders, there’s both a blessing and challenge in the fact that you pay tax in two lump sums:
- January 31: a balancing payment for the current payable tax year, plus the first payment for the following tax
- July 31: the second payment for the current payable tax year
There are benefits to paying tax in a lump sum like this, such as being able to accrue higher interest and avoid certain bank charges. On the other hand, sole traders have to be on the ball, remembering that 150% of the tax they owe for one financial year might require being paid in one go.
Some of the bookkeeping platforms we mentioned will keep you up to date with the amount of tax you need to pay and when. You can be even more organised by setting up your own easily-accessible spreadsheet, creating reminders in your calendar and so on.
It’s easy to shy away from even just looking at your business finances on a regular basis. But with practice, it’s something you’ll adopt into your normal routine, reducing that stressful shock to the system come January 31.
5. Stay in the loop
If you’ve worked out what tax you’re due to pay and when, put aside time to do your bookkeeping and found a simple system for organising your records, you’re solidly set up to file your taxes with minimal stress. For extra reminders and guidance, you can sign up for HMRC’s business help and education emails,which“are designed to help you understand what you need to do and how to get it right first time”.
It’s no surprise that tax filing preparation feels stressful when you’re trying to start up and grow your business. But with the tools available, a little organisation on your part and some strategic reminders set up to help when you’ve not got the headspace, this is a necessity that doesn’t have to feel quite so daunting. Prepare, be ready and feel confident accessing the support you need, even on a short-term basis.
6. Use Square to run your business
Now you’ve got the issue of tax taken care of, why not invest in smart solutions to improve the overall running of your business? 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, to help you identify how your company could perform even better.
Manage your entire business from the touch of a button. Send invoices, respond to feedback, create discounts on products, organise your team, oversee inventory details, and so much 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.