Why is my self assessment tax bill so high?

There’s nothing more stomach churning than a tax bill that’s far higher than you anticipated. If you’re not prepared, you can be left scrambling to get the necessary cash together, wondering where you went wrong, and dreading another unpleasant surprise in the near future.

But taxes don’t have to be a shock. With the right information – and a support team behind you – you can be ready for anything HMRC throws at you.

Here are the three main reasons I see clients receive unexpectedly high tax bills, and my top tips on how to prepare so you never have to fear the taxman again.

1. You didn’t pay tax your first year of business

To best understand this scenario, let’s use an imaginary new business owner named Mx. Taxpayer. Mx. Taxpayer started their business within the 20/21 tax year, meaning somewhere between April of 2020 and March of 2021. Even if Mx. Taxpayer opened their doors on April 1st 2020, their Self Assessment tax payment for the 20/21 tax year won’t be due until January 31st of 2022.

That means they went 22 months before having to pay tax.

When that first tax bill finally comes around nearly two years after opening up shop, Mx. Taxpayer is shocked. They’ve been so focused on covering the costs of getting their business off the ground, they haven’t prepared at all, and now they have to pull together two years of taxes out of nowhere.

Solution: set aside savings from the jump

You should be putting away at least some money every single month you’re in business so you have savings ready when that first tax bill comes around. 30% of profit is a typical recommendation, based on the idea that ⅓ of your profit is for business, ⅓ is for you, and ⅓ is for the taxman.

But, like anything with finances, this all depends on your unique situation, and could be affected by things like your income amount, loans, and other outgoing payments you need to make each month. That’s why I recommend consulting with a professional for tailored advice, or using HMRC’s Ready Reckoner tool that helps you predict and budget for your next Self Assessment tax bill.

2. You waited until the last minute to do your self assessment.

Mx. Taxpayer has been busy all year. They know they have until January 31st at midnight to both send in their (online) self assessment tax return and pay what they owe. With the deadline fast approaching, they finally sit down to complete their tax return when – oh no – they discover their bill is way higher than they anticipated. Now, they have just days to figure out where they’ll get the extra money they need or face late payment penalties and interest rates.

Solution: draft your self assessment early

Some things in life can be done right before a deadline, but taxes aren’t one of them. To save yourself from any last minute, nasty shocks, complete a draft of your self assessment as early as possible.

In Mx. Taxpayer’s case, they could have done a draft of their self assessment after the relevant tax year ended in May and had nine whole months to ensure they had what would be due in January. We promise: a bit of extra work in the present will save you from plenty of stress in the future.

3. You’re making more money

It’s hard to look at the bright side of taxes. But, often, a higher tax bill is a sign of success. It means your business is taking off and bringing in more profit than in the past! (yay!)

When your business crosses a certain threshold of success, you’ll have to start paying taxes twice a year. This is known as ‘payments on account’ and it’s required for all businesses who owe more than £1,000 in tax. Let’s look at Mx.Taxpayer once again to better understand this.

After another year of business, Mx.Taxpayer completes their self assessment for the 20/21 tax year. Their tax bill is much higher in the past because they’ve made more profit and, since it’s now over £1,000, HMRC decides they don’t want to wait a full year to start getting payments  for the 21/22 tax year. Mx.Taxpayer was asked to pay their full 20/21 tax bill plus 50% of next year’s tax return!

Solution: complete a self assessment between April and July for a more accurate payment

Payments on accounts are based on your previous tax year. This means your first tax payment of the year, due on the 31st of July, isn’t based on your actual profits for the past four months. If you had unexpected success in the previous tax year, or circumstances have caused your profits to dip within the first half of this new tax year, you’ll owe far less than what HMRC might have predicted.

We recommend completing a self assessment for the time between April and July. This will help ensure you’re paying what you actually owe and not having to wait for the following year for a refund.

Every successful business reaches a turning point where they’re suddenly making – and owing – more money. Though it can feel daunting at first, the sudden uptick in taxes will soon level out and feel more reflective of the actual money you’re bringing in.

Taxes don’t have to feel scary. To learn more about how we remove the fear from finances and help you build the healthy, happy business of your dreams, get in touch with the Fearless team today.