Saving to pay tax

If you are employed, or receive a pension from a non-State provider, any tax you should pay is probably deducted before payment under the PAYE rules. Assuming HMRC administer this process correctly, any taxes due should be settled in full.

However, the self-employed, those in receipt of significant dividends or bank interest, and retired persons who receive the State Pension in combination with other significant income streams, may possibly owe HMRC unpaid tax at the end of the tax year.

To save to meet these potential liabilities it is necessary to estimate current income, work out any taxes due and be aware of the date on which these likely liabilities will need to be paid. It is then a simple matter of dividing the liability by the time available to arrive at a monthly amount to put by.

If you don’t follow this process, you will have to pay tax on your current income from income in future years. Which is fine if all your income sources continue at the same level, but if your overall income falls, or stops, a disproportionate part of subsequent earnings may need to be allocated to pay past taxes causing financial hardship in those later years.

The same process applies to companies subject to corporation tax. Corporation tax is due nine months after the end of an accounting year. If directors keep a weather eye on current year profits, it should be possible to make some provision for tax on those profits, such that when the tax is due for payment, funds are available to settle.

The solution in most cases is to do the math, and when possible, save out of the income that created the tax liability in the first instance. Readers who would like help to figure out how to do this, please call, we would be pleased to help.

Latest Blog
17
Feb

Small business stress and government response

A UK parliamentary report has been widely covered this week warning that small firms ...

Read More
12
Feb

Waiting until the year end to plan tax often costs more than it saves

Many business owners and individuals only think about tax when a deadline approaches ...

Read More
10
Feb

Reviewing pension contributions before 5 April

For many people, pensions are seen as something to think about later in life rather t...

Read More
03
Feb

Construction Industry Scheme – tackling fraud

Tackling fraud in the Construction Industry Scheme (CIS) was one of the measures addr...

Read More