HMRC have just produced a leaflet to help people know how much money they should be saving towards their first tax bill.
What a wonderful idea. It could be improved in places, but it is better than nothing, which is about all most newly self employed people have to calculate their tax liabilities, unless they are using FreeAgent which does provide an estimate of any tax due and the dates it has to be paid.
The problem of not having any money to pay is compounded by the time between starting self employment and having to pay the first tax bill. Someone who started self employment last April (2011) will not have any tax to pay until 31 January 2013, but will then be faced with a bill for 18 months tax and Class 4 National Insurance!
The most difficult part of using the table in the leaflet will be arriving at a profit figure. HMRC define profit as income less expenses. It is vital that you don’t include the money you take out of your business for yourself (drawings) as an expense like wages paid to your staff – it isn’t.
Finally, may I suggest that if you are saving for your tax you keep the money in a separate account from your business current account otherwise it will just “disappear” and when the time comes to pay the cupboard will be bare.