Tax for the Self-Employed
If you are self-employed it is a good idea to set aside some money to pay your self-assessment income tax bill.
The simplest way is to open a savings account (in Current Assets, type = bank), then make transfers from bank to savings whenever you have some spare cash. Because you can see your taxable profit in the Profit and Loss section of your Chart of Accounts at any time, you can make an educated guess on how much to put aside. Here’s a link to HMRC guidelines on tax and the self-employed:
As a very rough guide, set aside around 28% on profits above £6,000. The threshold is slightly lower at the time of writing, but it is likely that you will be able to claim capital allowances, which will reduce the overall bill. Note that if your profits go above £37,400 (2009/10) the rate of income tax (at the time of writing) increases to 40% for all profits above that threshold, so you will need to set aside a little more.
The above figures are based on class 4 NIC of 8% and the basic rate of tax at 20%. There is a further NIC rate of 1% on higher earnings, which you may also need to take into account.
Alternatively, you may wish to set up a reserve without transferring any money. To do this open a new account of type ‘drawings account’ in Equity. Name it Tax Reserve. From time to time, make a Transfer Transaction From Retained Earnings To Tax Reserve to keep it topped up to your estimate of tax owed. When you actually pay the tax (normal transfer From Bank to Drawings) make another transfer From Tax Reserve To Retained Earnings to keep that up to date (ie. reduce it to reflect the tax actually paid).