How you should Budget for your Tax Bill is this week’s podcast theme.  If you are self-employed, a freelancer, run your own business then you have responsibility for your own taxes.

You do not have an employer who takes care of that for you.  When you are self-employed you must keep records, work out your tax profit, complete a tax return and then pay over the tax that is due.  It sounds exhausting and stressful.

Listen to find out more.

How good record keeping helps you keep on top.

Firstly, you need to know what you are spending and what you are selling.  Secondly, if you want to know much tax you will pay, you need to know how much profit you are making.  To do that, you need a good record-keeping system.

There is one real option these days, and that’s Cloud Accounting.  Knowledge is power, and that power is unleashed when you embrace the world of Cloud Accounting.  Click here to get our free guide.

In the words of Dee Hock “Making good judgments when one has complete data, facts, and knowledge is not leadership - it's bookkeeping.”

Your gut feeling for making decisions is important, but gut feeling alone is bonkers.  Facts and good information are what drives effective decision making.  To have good information you need excellent record-keeping systems.

Listen to find out more.

How to calculate how much tax to pay

The amount of tax you pay is based on so many variables.  These include how much profit you make, allowances, reliefs, other income you may have, your personal circumstances.  You get the picture.

In this podcast, I share with you tips on how to do this quickly and easily.

Listen to learn more.

Want to learn more and want a quick and easy way to know how much to pay? Use our free tax calculator, designed for the self-employed and companies?  Get in touch with us to see how we can help you with your accounting and business needs. Press subscribe so you don't miss an episode of I Hate Numbers.  For more business and finance, news, advice and tips.

In This Episode

• Understanding How you should Budget for your Tax Bill
• Get some great tips to figure out how much tax to save.
• Appreciating what part your mindset plays in budgeting for your tax.
• Being aware of what your tax bill is based on.
• The importance of keeping good records.
• Developing your own Numbers confidence and decisions
• Take more control of your numbers to help make you money, survive and thrive

Links

https://podcasts.apple.com/podcast/proactiveresolutionss-podcast/id1500471288

https://play.google.com/music/m/I3pvpztpjvjw6yrw2kctmtyckam?t=I_Hate_Numbers

https://open.spotify.com/show/5lKjqgbYaxnIAoTeK0zins

https://www.stitcher.com/podcast/proactiveresolutionss-podcast

https://tunein.com/podcasts/Business–Economics-Podcasts/I-Hate-Numbers-p1298505/

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

What's the difference between a taxidermist and the taxman? Well, the taxidermist leaves the skin on. Today's podcast is about tax, more particularly, how you as a self-employed business should budget for your tax bill. Hi, folks. My name is Mahmood. I'm an accountant with his own firm of 26 years. I'm an educator and a mentor, and I've just taken a short break from preparing and filing tax returns in the UK for my clients,

and I want to share with you some thoughts and tips that I share with my client base about why you should budget for your tax bill, how you should go about it, and some great useful tips that you can use in your own self-employed business. Now, I think the first thing I want to talk about is why you should bother?

If you have been in the world of work as an employee, you know that your employer will be taking responsibility for administering all the tax rules, will be taking money off you, as you are paid on a weekly or monthly basis, take care of all that, and then paying it over to the authorities. When you make that transition to the world of self-employment, running your own business, then you have multiple tasks to deal with, and one of those is that you are responsible for your own tax.

Not just paying it, but making sure that the requisite forms, make sure the documentation, the rules and regulations are complied with, and then typically, once a year, you'll be submitting a tax return to authorities and paying any tax that's due. Now, this could be quite a shock for you in terms of when you get an unexpected amount coming out.

For me, I want to emphasise the fact that tax is a cost, like all other costs. The merits of budgeting for that to minimise the level of anxiety, to minimise that sudden pain when suddenly a great big, unexpected liability appears, and that's the focus of the podcast. Following on from that, if you are in the world of employment, as we said, then all the responsibilities for tax collection, tax paying over is delegated to your employment.

Now, for self-employed, tax is not collected off your earnings as you make them. They're typically collected once a year. First thing you need to do in your self-employed business is to make a visualisation and consider your sole-trader business as effectively your employer. And your business is employing you to work in the business.

If you make that visual distinction in your own mind, if you make that psychological separation, then you will see clearly that all the profits that you generate, all the tax that's due on that profit doesn't actually belong to you. It belongs to authorities. So, having that clear visualisation makes it much easier to get that discipline in.

The second thing I'm going to share with you is what is taxed levied on? Now, we're talking self-employed individuals here. We might call them sole traders. We might call them freelancers. And effectively, you are taxed on the level of profits that you create and make in your self-employed business. Usually that will be what you are invoicing, what you are selling to your clients, deduct any expenses such as advertising, travel costs, maybe renting facilities, paying your accountant.

Let's get that one in there. The difference in there, between those two, is profits, and profits is going to be the name of the game for your self-employed business. Now, it's that figure that's left over, that profit is what you are taxed on, and in the UK, typically, you pay two types of tax. You'll be paying income tax and you'll also be paying national insurance.

Let's take that tiny step back here. So, we've got this idea that's as a sole trader, a self-employed business, profits that you make are what is going to be taxed. You will potentially be paying income tax and national insurance. Now, the purpose of this podcast is not to talk to tax experts. It's to give you a very helpful framework, a very practical jargon-free way of approaching your business.

At the end of the podcast, I'm going to show you some tips and tools that you can use to actually work out the numbers of the level of taxes owed on the profits that you make. Let's go back to this idea of income tax and national insurance. In the UK, you are allowed to have a certain level of income

which is free of tax. For the year 2021, it's twelve and a half thousand. The purpose of this podcast is to give you a framework, by the way, so please always check the actual rates and check the calculator at all that I'm going to refer you to at the end of the podcast. Anything over twelve and a half thousand will be taxed at 20%.

Another tax that is levied, which a lot of self-employed people aren't aware of fully and escapes them, is that you also have to pay national insurance. It's at a different level, and for the year 2021, anything over nine and a half thousand is taxed at the rate of 9%. So, what we then have is a situation of you have a pool of profits, taxes levied on those profits,

and it's taxed at 20% or 9%. Again, the actual rates we don't need to concern ourselves with. It's just the idea that profits potentially equate to tax being levied. Now, one more sting in the tail, so to speak, is if the tax that you owe the government is over a thousand pounds in the UK, then you also have to pay an additional 50% upfront, which is what's called payment on account.

Think of it like an installment of tax going towards your following year’s tax bill. Now, tips-wise, how do we actually approach this? So, we've got the idea that we should be budgeting for our tax bills. We've got this idea of what tax is levied on. It's effectively profits from your self-employed business, and these are tax profits.

You pay national insurance and income tax. I've mentioned the rates. Now, let me share some tips with you. Now, the first one we mentioned at the beginning of the podcast is to visualise your business as your employer. You are the employee in your business. Now, fundamentally, in real terms, you and the business are one of the same.

You are working for yourself, but in terms of that visual distinction, that's not only useful for tax, but it's useful for also other disciplines. More on that in a future podcast. Number two, have a separate account. Now, lots of self-employed businesses will have one bank account and everything will flow through that.

So, when they look at the bank balances, they think, oh, that looks very healthy, but within that is buried monies that are going to be paid out to the tax authorities. So, my view would be, my recommendation, my tip would be: open up a separate bank account, open up a separate savings account and ring fence, and put money aside on a regular basis to go towards paying that tax bill.

Take it out of your main current account. Put it to one side. Number three, keep good records. Now ,I'm a big fan of the digital world when it comes to keeping records, getting that heavy lifting done. Check out previous podcasts where we've talked about digital accounting. Check out the show notes at the end where we will provide links to how you go about this. Absolutely critically these days where you are an acorn-size business or a mighty oak tree of a business, you need to have a really good digital

online bookkeeping system. It's not only good for tax purposes, by the way, but it serves a whole host of other good things. But when we're talking about tax, knowing what you've got to pay potentially, then you need to have good records. The fourth thing you do, the fourth tip is to actually make sure you have an estimate of what you owe.

Now, it took me several years through my professional exams, and my tax exams, and other qualifications to get experienced, to gain that knowledge, and I've got effectively 35+ years of experience. So, I'm au fait and comfortable with the UK tax regime. It does make my head hurt on occasion. So, this is not about making you a tax expert, it's about giving you a guesstimate, a good guesstimate of what your tax exposure will be.

So, you've got to calculate it, and what I'm going to share with you, folks, in the podcast notes is a link to a tax calculator, and the tax calculator is geared for sole traders, self-employed, and also as a Brucie Bonus, I’ve thrown in a tax calculator if you're a corporate body. The principles still apply. If you run your business through a limited company, that limited company will have a tax bill.

It doesn't have the same free allowances and the tax calculator copes with companies as well as sole traders. So, that will alleviate you of the heavy lifting and the mathematical gymnastics you've got to go through. The last thing I would recommend is what I call a rule of thumb. So, if you are invoicing clients, it's always good to have what I call a rule of thumb

about how much of that invoice should you put away for your savings. There are three numbers I'm going to share with you. Now, if your self-employed profits in the UK are in the order of about 15,000 pounds, then put away 10% of whatever you invoice to a client. So, if you invoice a client or charge a client 100 pounds, 10% of that, 10 pounds, put to one side to cover the tax that's due on that invoice.

If your profit's in the order of 25,000, then you want to be putting around about 23% away. Again, if you like easy numbers, 20% will work and that'll cover, not necessarily everything, but it'll cover the majority of your tax bill, including your payments on accounts. Now, if you are in that situation where your profits are hovering to the 50,000 pound mark, and this is your profits from your business, so that's what you're charging less any expenses, then you want to be putting 33% of what you invoice to a client.

So, 100 pounds at the lower end is 10 pounds and the upper level is 33, and that will cover pretty much the majority of your tax. Now, bear in mind, that's not the actual detailed answer. You have to complete a tax return. You have to think about the release, but that's pretty much going to keep you on the straight and narrow.

So, let's summarise what we've got here, folks. How you should budget for your tax bill? Well, first of all, you need to, because you don't want those nasty shots coming out. You have a responsibility. It's a legal obligation, and you want to make sure you've got that covered. And tax is like any other cost that you should be budgeting for.

Number two, we've talked about what you are taxed on, and it's fundamentally the profits that you make in your business. Number three, we've shared some tips as to how you go about that. Folks, have a look at the show notes. Check out the reference to the tax calculator that's in there. Hope you have a fantastic week.

I'll look forward to catching you in the airwaves next week. And if you liked the podcast, which I hope you have, I'd love it if you could share it, feedback, comment, and if you've got some thoughts for a future podcast, what you'd like covered, let me know accordingly. Faith in that. Have a brilliant week. We hope you enjoyed this episode and appreciate you taking the time to listen to the show.

We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.