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Can I Plan Ahead To Pay My Tax Bill?

Good tax planning is essential to minimise your tax bill and prepare for the impact tax payments will have on your business’s cash flow. Whether you’re getting ready to pay your VAT, GST, sales tax or corporation tax – the best way to keep your business cash flow healthy is by planning ahead.

Most business owners will seek professional advice to assist in their tax planning. An accountant can help you work out a way to be as tax efficient as possible. How much tax you pay is dependent on a range of factors, including the legal structure of your company, how you use allowable expenses to reduce your tax liability and if you are a GST or VAT-registered business. It’s important to remember there are different rules for charities too.

Planning for your tax bill

Tax planning is most effective when done well in advance of your year-end. By planning ahead, you can look at what action you need to take now to reduce your tax bill and make sure the payment has minimal impact on your business’s cash flow.

Ongoing monitoring of your business performance will help you stay up to date with your tax position. A cloud-based accounting system such as QuickBooks or Xero, coupled with a cash flow forecasting tool like Float, will allow you to access your business’s financial information and see a real-time snapshot. It’s also a good idea to use a receipt managing tool like ReceiptBank to make sure you’re claiming tax for everything you can. This approach to managing your business finances is compliant with the UK Government’s Making Tax Digital strategy which aims to help businesses be better at managing their taxes by adopting the latest technology to manage company finances.

For example, if you’re one of the business owners that took advantage of the UK Government’s tax deferral scheme, which was introduced to help businesses in the early stages of the coronavirus pandemic, it’s even more essential you start planning for paying your tax bill now.

The deferred VAT payments were initially set to be paid over the same period as the usual VAT payments for next year, making it a double-whammy of outgoings for business owners. The good news is that, rather than paying a lump sum at the end of March 2021 as originally laid out, you now have the option to make smaller payments right up until the end of March 2022. However, these extra outgoings will inevitably have an impact on your cash flow. To minimise the risk to your business, you should be planning ahead – looking at when you are going to make the payments and where the money is going to come from to pay them.

Factoring tax payments into your cash flow forecast

Calculating your upcoming tax payments is tricky, but you can use a spreadsheet with formulas to do it. For instance, do you pay 20% of your income in sales tax or VAT? Create a formula that takes 20% of your income and applies it to your sales tax line. If your tax structure is more complex than that, we’d recommend you enlist the help of your accountant.

If you’re using Float, you can create budgets for upcoming tax payments. Taxes are complex and differ depending on where you are in the world, so for that reason Float won’t automatically calculate tax for you. However, you can still include tax predictions by creating budgets for your upcoming tax payments – using a placeholder if you don’t know the final number for future months. When you pay your tax bill, Float will import that transaction via the one-way sync with your Xero or QuickBooks account.

Simply add your tax payment as a budget – whether you pay annually, quarterly or monthly – and you’ll be able to instantly see how it will affect your cash flow.

Creating a new cash budget

For example, you could add a budget of £2,000 every quarter, so you know this tax payment will be coming out of your overall cash. It’s flexible, so you can update it at any time in the future to change the amount or expected date.

Once you’ve paid your tax bill, the amount will become a reconciled cash transaction in your accounting software, and then when you sync to Float it will replace your forecast numbers. Good stuff!

Don’t bury your head in the sand when it comes to planning for your tax bill. Take action now – future you will thank you for it. Start forecasting today, with a free 14-day trial of Float.

Further reading:

How Do I Keep Track Of My Bills?

Louise Bayley-Boyd

Digital enthusiast, passionate about helping small businesses survive and thrive.