One of the key elements of responsibly managing a business is estimating and setting aside amounts of money, which can later be used to pay company and personal future tax liabilities when they fall due.
Different tax liabilities fall due at different times. It is, therefore, important to understand this calendar of events and how to provide high-level estimates of the amounts that will be due. Ultimately, though, these are estimates, and we, therefore, recommend that clients use methods which will result in an overestimate of the amount of tax which will be due for prudence reasons, as any overestimated values can still then be extracted from the business at a later date, and there will be no nasty surprises when it comes time to pay the tax!
VAT is typically paid quarterly based on when the company first registered for VAT, as one calendar month and seven days after the end of a VAT quarter, unless the Annual Accounting Scheme is applied. Unless your business has significant VATable expenditure, then a safe estimate based on current tax rates can normally be achieved by clients setting aside 20% of the value of the sales invoices raised. The amount of VAT payable in respect of transactions processed to date will also typically be recorded as a liability in the balance sheet of your company.
PAYE / NIC / CIS
Employers who, over the course of a tax year, expect their average monthly PAYE to be less than £1,500 can elect to make PAYE / NIC payments quarterly, and other employers must pay PAYE / NIC on a monthly basis.
Monthly payments are due by the 22nd of the following tax month or by the 19th if you pay by post, while quarterly payments are due on the 22nd after the end of the calendar quarter. Construction Industry Scheme payments work on a similar basis and are due by the 19th of the following month.
The amounts the business must pay are advised on employee payslips, and similar to VAT, the amount of PAYE / NIC payable in respect of payroll processed to date will also typically be recorded as a liability in the balance sheet of your company.
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Corporation Tax is normally due and payable on the year-end profitability of the company nine months after the end of the accounting reference date of the company.
This provides a welcome positive cash flow impact to the business, providing that sufficient funds are set aside throughout the year to meet this future liability, but it does mean that the value that clients set aside is harder to estimate as you will not know the taxable profit of the business, the associated tax rate to apply, and resultant taxation payable until after the annual Financial Statements and associated CT600 Corporation Tax return have been produced.
For many years, we have enjoyed a period whereby Corporation Tax has been comparatively easy to estimate as a fixed percentage of business profitability. Therefore, similar to VAT, unless your business has significant deductible expenditure, then a safe estimate based on current tax rates could previously be achieved by clients setting aside 19% of the value of sales invoices raised.
However, due to recent changes in tax laws, the process is now more complex, as following the 1st of April 2023, tax will now be charged between 19% and 25% based on the profitability of the business and how many “associated companies” exist. Furthermore, there are complex transitional rules which apply to the first company year-end, which falls within the 2023/24 financial year (1st April 2023 to 31st March 2024). And we have already written a more detailed article to help clients understand this: Corporation Tax Rate Changes
Unlike the other company taxes (VAT and PAYE / NIC / CIS), the liability recorded in the balance sheet of your company will not necessarily represent the total tax due. As this value will include any corporation tax not yet paid from earlier years, and in many cases, it will also include monthly estimates for the current year until the end of January 2023 based on the previous Snapshot system.
Therefore, to help our clients estimate how much cumulative tax they should set aside for the current company year, we have created an Excel calculator template, which has been saved to the Portal (Menu/Templates Factsheets/Templates – Estimated Corporation Tax Calculator). This can then be used by clients to estimate the cumulative amount of Corporation Tax to set aside for the current company year.
Given that, neither we nor our clients will know what the profit of the business will be at the end of the year until the accounts are produced. Then by virtue of the changes HMRC have implemented, there is a long period for which we will not know what rate of corporation tax will be applied to the current year.
So logically, clients have two options for estimating money to set aside in advance to pay Corporation Tax:
- Set aside a fixed percentage of profitability each month – This is possible where you can reliably estimate the ANNUAL profit of the business in advance. So, for instance, if you believe that profitability for the current year will largely match last year’s position, or you can estimate it in some other way, then you can use this ANNUAL value in the calculator to estimate the rate of tax to apply to monthly profit to set aside each month.
- Set aside an increasing percentage of profitability each month – Where you are unable to estimate the current year’s profitability, you can use the profit figure for the year to date in the calculator to work out the cumulative rate of tax to set aside. For businesses with cumulative profitability between the £50k and £250k thresholds (assuming no associated companies), this means that the rate of tax payable will increase each month as the cumulative annual profit increases. So you can set aside enough in total each month to cover the cumulative annual tax incurred to date.
There is a section at the top of the calculator which will allow you to reconcile this back to the balance sheet liability position by subtracting any Corporation Tax already set aside for the current year and adding back any due but not yet paid in respect of earlier years.
If you are a prospective client and would like more information about how the Corporation Tax rules will impact you after the 1st of April 2023, please give one of our Accountants a call!
Dividend & Personal Taxes
In addition to the above Company Taxes. For those clients who receive dividends, submit a P11D for benefits in kind, and/or submit a tax return, it is also prudent to privately set aside some money to meet your own personal tax liabilities.
Where the amount of tax payable in the prior financial year exceeds £1000, you will normally have to make payments on account on the 31st January and again on the 31st of July, equal to half the tax you paid in the prior year with any balance payable on the 31st January following the end of the tax year.
The amount of tax you must pay will be advised to you when you receive your personal tax return. However, as discussed above, clients can estimate the two payments on account for the current year as half the prior year’s tax liability. If you require a more accurate assessment of your current year’s personal tax liability before the issue of your personal tax return, then our Accountants should be able to assist you in providing a high-level estimate until the final figures are determined.
Rishi Sunak has proposed a number of changes to the way that Corporation Tax will be calculated and applied. Learn more.
Autumn Statement – Headline Changes Extracted from the ACCA Guide to the Autumn Statement 2022
In advance of the deadline for the submission of these returns (6th July each year), we wanted to give our clients some guidance as to what these are and when they are required to be submitted to HMRC.