Don't spend that last pound!
When you start your own business you move into a different way of being taxed – everything is deferred, your payment of tax is delayed.
As an employee you receive a payslip that details the PAYE and National Insurance (NI) that has been deducted from your gross salary to arrive at your net salary. There will, probably, be other deductions like pension contributions. As long as your tax code is correct then your PAYE should be calculated correctly – as we have warned before: all employees should regularly check their tax codes.
When an employee is paid, their tax and NI has already been deducted and usually will never need to pay any more tax in the future, errors aside.
If you are self-employed or have your own company, both you personally and the company will pay tax in the future. These taxes are based on the taxable profits of the business.
The company has to pay corporation tax 9 months and 1 day after the end of its accounting year. Therefore if the year end is 31 March the corporation tax is due to be paid on the following 1 January. You can read more about corporation tax here.
If an individual has untaxed income: property rentals, self-employment profits or company dividends, these have to be declared on their self-assessment tax return, which covers a tax year: 6 April to the following 5 April. The tax and NI due from the tax return is due to be paid by the following 31 January. Therefore the tax due for the tax year 6 April 2018 to 5 April 2019 needs to be paid by 31 January 2020.
As payments on account have already been discussed in this startup series, you can read about them here. Payments on account are paid each January and July.
If your business is VAT registered then the VAT should be paid one month and a week after the end of the VAT quarter or if you pay by direct debit it will be taken out one month and 10 days after the end of the VAT quarter. Read more about VAT here.
All this means is that you and your business have tax liabilities (for Income Tax, NI, Corporation Tax and/or VAT) to pay an undefined amount of tax in the future. You must set aside some money to pay these future costs. HMRC have to collect these taxes and usually they are very good at collecting them. This is the tax timing difference you must be aware of and is why we warn clients that just because everyone else has been paid and there is £1 left in the business bank account at the end of the month, unless you have set aside some money for tax, you cannot touch that £1!
If you need help with your tax affairs then please do not bury your head in the sand but do something constructive – get in touch with us.