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Tax: start as you mean to go on

Tax: start as you mean to go on
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Posted: Wed 28th Sep 2011

Incxome tax square on Monopoly board

**Tax is probably the last thing on most peoples' mind when they're starting up a new business venture, but it shouldn't be, writes Russell Cockburn, former tax inspector and author of Small Business Tax Planning.**  If a business is going to be profitable, no matter how large or small it is, tax liabilities should be planned in right from the start as part of the business's cashflow forecasting and planning model. Tax is just another, (important) overhead and should be treated as such.  Putting in place good control systems and procedures so that tax bills don't creep up on you and take you by surprise is absolutely fundamental to a good business plan. Setting aside money for tax will be a sensible planning step.Â

**What should you set aside for tax?**Â

A new business may have income tax or corporation tax, PAYE, nic and Vat liabilities to consider, to name just the main ones. These will all have to be catered for and funds set aside to pay to the taxman. Failure to do this will at best result in very difficult cashflow management issues arising unexpectedly and at worst could cause the business to fail with potentially dire consequences for the owner.  How much to set aside will require good forecasting of your expected level of income and profitability. For a small businesses start-up a sound rule of thumb is probably to set aside in a deposit account or some similar easily accessible source of funds about 20 per cent of your  monthly net income. This is your turnover less day to day running expenses.  Basic rate income tax is payable on the first £35,000 of taxable profits at 20 per cent after deductions for business expenses and also capital tax depreciation allowances for purchase of business plant and equipment, and so on. So this will probably be a good guide amount for most small business. As profits rise above this level, then the higher 40 per cent rate of tax on income starts to bite so more should be put to one side to allow for this. Above taxable income of £150,000, tax is due at 50 per cent so a lot more will need to be reserved for income tax.Â

**Speak to an accountant!**Â

Self-employed people also have to pay class 2 and 4 national insurance contributions at 9 per cent on profits between a lower and higher threshold and also a weekly amount of £2.50. A good accountant will be able to assist the new business owner with accurate forecasts of their tax liabilities once the business plan is prepared and should probably be consulted at a very early stage so that problems do not occur later on.  Mistakes made on tax in the early days of a businesses life can prove disastrous. On the other hand, planning for tax well in advance means peace of mind, fewer sleepless nights and one less hassle to worry about!  Russell Cockburn is a former tax inspector turned consultant, advisor and author with Bluebell House Consultants. Image: Alan Cleaver

 
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