Are you putting a percentage of your earnings from self-employment away to go towards your tax bill? If not, you should be.
After all, once you've filed your tax return, you want to have enough set aside to pay it without stress, right? But how much should you be saving for tax? Today I'm explaining all.
Work out how much tax you'll be paying and save a bit more than that
Depending on your income, you'll probably be paying either 20% or a mixture of 20% and 40% tax on your profits (here's a guide to the different thresholds to help you work it out).
Once you know that number, add 5-10% on to it. Why? Well, you don't just pay tax - you'll probably also pay towards National Insurance Contributions and student loan repayments as well! And if your tax bill is over £1,000, you also have some payments on account to make.
So you ideally want a bit more money put aside than think you'll actually need, just in case the figure to pay is higher than expected.
But on the good side, you'll also have your tax-free Personal Allowance which will bring your tax bill down a bit
Save your income, not your profits
You pay tax on your profit - that's your income minus your allowable business expenses - not your total income. But I advise saving the percentage you decide on from your total income, not your profit. There are a few reasons why.
Firstly, it's easier to calculate the amount to put aside from the amount that you've been paid straight away rather than working out how much your actual profit is on that payment. Secondly, this way you can simply put that amount away before you even have the chance to think about spending it. It's too easy to think "I'll pay it back later" and then forget about it. And thirdly, it's better to have too much saved for tax than not enough.
Where do you put it?
Move the money you're saving for tax into a separate bank account, ideally one that you won't touch often and has a good interest rate. Alternatively, lots of freelancers put their tax money into premium bonds, which are safe and have a chance of winning tax-free prizes every month. The account should be purely for tax and nothing else.
Do you put money aside for tax? What do you do to make sure you're prepared for your tax bill? Let us know in the comments!
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