Life as a small business owner has a lot of perks. You get to do what you love, set your own hours, choose the clients you work with and genuinely make a difference in people’s lives. But there are some elements that aren’t so glamorous – like doing your own taxes. It’s one of those tasks that most business owners hate, either because it’s too time-consuming or they don’t have the skills to handle it properly. In fact, studies have shown that tax was one of the top challenges small businesses face in the UK every year. And honestly? I get it!
Why Do I Need To Plan For My Tax Bill?
Whether you like it or not, your tax bill will keep turning up every year. It’s just a part of being a small business owner, and unfortunately, there’s no way around it. So instead of ignoring it and pretending it doesn’t exist for most of the year, you should be planning for it. If only because that letter in the brown envelope will flutter through your letterbox, and if you’re not prepared it could cause you some pretty big problems with your financial health and cashflow.
There are some other reasons too, like avoiding the late fees from missing filing deadlines, or stopping your accountant from pulling their hair out in frustration when you present them with paperwork the day before the filing deadline. Plus, it’s just good business sense. It’s really not different from making sure you have enough products to fulfil an order, or enough time to complete a service.
But how do you plan for your tax bill?
What’s My Tax Bill Going To Be?
First things first, you need to work out roughly what your tax bill is going to be. I can’t tell you exactly what that is without looking further into your business, but I can give you a few pointers to help you work it out.
Firstly, remember that tax isn’t due on all the income of your business – only the profit.
To work this out, take your income and work out what you can deduct from it. Broadly speaking, this means the costs you incur on a client’s behalf, running costs and expenses like mobile phone bills, utilities and even chinks of rent can all be deducted from your profit. If you’re working from a home office, you can also claim something called ‘use of home’, which represents a percentage of your household bills, energy and water – all the things you need to work from home.
Working out what you can and can’t deduct as a business expense isn’t always straightforward, and it’s pretty normal to see small business owners pouring over their receipts trying to work it out. And a lot of business owners still end up reporting too high and paying too much tax because they’ve miscalculated something somewhere. It’s one of the main reasons I recommend working with both a bookkeeper and an accountant to get your tax return in order before you submit it to HMRC.
Once it’s submitted, HMRC do some maths magic and tell you exactly how much to pay them.
How Is My Tax Bill Worked Out?
There are generally two ways tax is worked out, depending on the structure of your business.
Tax As a Sole Trader: If you’re a sole trader, your tax works very similarly to an employee of a company. You have a personal allowance of tax-free earnings, and anything you earn above this threshold is taxed at gradually higher rates. The more you earn, the higher the tax band you’ll end up in. The tax band thresholds change every year, so you can find the most up to date rates here. It’s also important to remember that your personal allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. So, if you earn £125,140 or above, your personal allowance goes to 0.
Another thing you need to keep in mind is your National Insurance contributions. If you’re earning under £6,845 a year, then you don’t have to pay anything, but you can pay voluntary Class 2 contributions, which protects your NI record. If you’re earning above £12,570 a year, then you have to pay Class 4 contributions. For the tax year 2025-2026, this means paying:
- 6% on profits over £12,570 to £50,270
- 2% on profits over £50,270
Again, these rates do change year on year, so it’s important to check the thresholds each year.
Tax As a Limited Company: If you run a limited company, then your tax is a little more complicated to work out. For starters, you’re not only liable to pay tax on your company profits (known as corporation tax), but for your compensation as an employee as well. So you’ll be paying tax for your company and for yourself personally. Your personal tax works exactly the same as a sole trader does, and your NI contributions come out of your pay each month using PAYE deductions.
Corporation tax, on the other hand, is based on your company profits. At the moment, the lower rate (for profits under £50,000) is 19%, and the higher rate (for profits over £250,000) is 25%. There are special rates for a few things, like unit trusts and open-ended investment companies, but the majority of limited companies will pay the main rates. Of course, this can be a huge amount to pay in one go, so a great way to cover this is to put a percentage of your profits into a separate savings account every month – around 30% if you can. This builds up a buffer and means the corporation tax bill won’t be such a shock!
All of this might seem complicated, but don’t worry, you have help. At Bluebell Bookkeeping & Admin I work closely with small business owners to help them keep track of their financial records and make preparing for your tax bill as easy as possible. With my help, you can be well prepared for your tax bill, and avoid many sleepless nights. And stop dreading the brown envelopes!! For more information, all you have to do is get in touch with me.