When even the great Albert Einstein found tax perplexing – famously declaring income tax ‘the hardest thing to understand in the world’ – it’s little surprise that so many of us find managing our tax affairs a minefield of confusion. For the millions of UK residents who need to complete a self-assessment tax return each year, however, the issue of income tax is sadly unavoidable.
So what can you do to grab the bull by the horns and take control of your taxes? It’s all about creating good financial habits that will put you in the driving seat when it comes to your financial affairs. These are the top five good habits by Mike Parkes, Technical Director at GoSimpleTax to get into to help you take back control.
A surprising number of people still manage their finances manually. But the Government is forging ahead with plans for Making Tax Digital for income tax, which will make it mandatory for individuals to track their affairs online in real-time using one of HMRC’s recognised software vendors – of which GoSimpleTax is one. If you aren’t already using a software to manage your finances then now is the time to start.
Keeping a close eye on the books allows you to run your business with greater accuracy and foresight of any issues. There are plenty of digital software products that make running your business much easier – and tax tools like ours integrate with a range of bookkeeping software products to automatically import your transactions, making your tax return that bit easier.
Sweat the small stuff
It’s important to remember that tax is all about details and accuracy. There’s no room for estimates, guesses or round-about figures. Every penny should be tracked and accounted for.
Your tax return must show your taxable profit accurately, so you should make a regular habit of checking for discrepancies and noting any tax-deductible spending, as these may have a considerable impact on the amount payable at the end of the year. When it comes to submitting your return, make sure it reconciles properly with your supporting record and documents and that there are no unexplained grey areas.
Understand what you can claim
There are plenty of legitimate tax-free elements to running a business, and it’s important that you recongise them and account for them properly. Phone bills, materials, marketing expenditure and so on can all be part of your business’ tax-free expenditure. Look at all your outgoings and establish what falls into this bracket, then remember to include it in your annual self assessment tax return.
Understand PAYE vs dividends
Lots of entrepreneurs opt to trade via a limited company instead of as a sole trader. In these circumstances they pay themselves a small wage and then top it up with a monthly dividend in order to keep cashflow within the business. If you’re receiving a wage of more than the tax-free bracket of £12,570 then you’ll be paying income and NI tax on that amount each month through PAYE. But your dividends are a separate matter; taking money out of a business in this way makes it more complex when it comes to self-assessment. Put down on paper where each part of your monthly income comes from so you can be clear on what elements need to be declared in this tax return.
Similarly, you must ensure you are tracking and accounting for all your income – including profits from crypto currency trading, eBay sales, Air BnB rentals and so on. Your side hustle counts as income just as your normal income does.
Don’t forget pensions
Self-employed people don’t benefit from employer pension contributions and nor are they auto enrolled in a programme, so it’s little wonder that so many don’t have a pension plan. Similarly, many entrepreneurs and start up business owners opt not to contribute to a pension plan initially as they seek to maximise cashflow. But pension contributions do attract tax relief, so if you are saving for your long-term future by putting money in a rainy day bank account you might be better off putting it into a pensions fund.
Ultimately, the best habit you can get into is being proactive and taking advantage of the many tips, tools and tricks that can help you get your ducks in a row. Once you understand your financial picture properly, managing tax affairs becomes much simpler.