Avoiding an unexpected tax bill
As a small business owner, it’s important to be aware of what taxes you need to pay and when you need to pay them. This can make running a business much easier; a well-managed business should have no such thing as an unexpected tax bill.
For an individual, working out the tax you owe after your first year of trading is relatively straight forward and is based on the tax return detailing your business’s first year profit. As you won’t have paid any tax since starting out, the full amount is due as terminal tax near the start of the new tax year, normally in the first week of April.
Your business tax starts to get more complicated from year two because if you’ve done well in that first year, Inland Revenue now expects you to make instalments towards the tax you are going to have to pay in the coming year. This “second year sting” means that your business is effectively paying two full years of tax in one – both terminal and what’s called provisional tax. If this isn’t budgeted for, it can cause business owners a lot of anxiety.
Provisional tax is similar to PAYE for a wage or salary earner: it’s a way of spreading out taxes for a business, instead of facing one large end-of-year tax bill. Provisional tax payments factor in business growth and are spread over the year in three equal instalments.
The tax is called 'Provisional' because the amounts are only an estimate. Any difference between the actual net income and the Provisional tax paid is sorted out in a terminal tax “wash up” payment. If ever profit falls short of the estimate, tax overpayments are refunded.
If you’re starting out and need help with your tax obligations, please contact our team.