Construction Businesses are chaotic enough and something as simple as a Tax Budget can provide the reassurance and organisation that will provide peace of mind with what is coming ahead.
For every client that comes onboard, the accountancy team reviews the taxes the company pays and builds a tax budget for the business. From the very beginning, they are supporting construction businesses with what is coming ahead and putting a plan in place to be prepared.
🤔 How can you build a Tax Budget?
The main taxes a typical construction business will see are VAT, PAYE, CIS, Corporation Tax and Personal Tax for your yearly dividends. Let's run through each tax and see how we can prepare for them;
If you are working for contractors then you will typically be in a reclaim position with HMRC although if you are working within the residential market you will still be paying VAT. To build your tax budget for VAT, we would find the average VAT amount paid each quarter i.e. if your last 2 VAT returns were £8,000 and £10,000 we would use £9,000 as the VAT average amount. The VAT return period is normally 3 months so you will do £9,000/3 = £3,000 per month.
We would recommend splitting this by 4 weekly amounts i.e. £750 a week being transferred to your VAT savings account.
Your PAYE/CIS is combined in your HMRC Gateway Account so it can be easier to keep this together. If your tax is under £1500 per month you will be paying HMRC every quarter but once you go over this amount, you will need to pay HMRC monthly so this is something to keep an eye on!
Again you will want to find your average PAYE/CIS amount which will be viewable in your Gateway Account or you will be able to find this information in your accounting software like Xero. You will divide this number by 4 again and set up the amount to be transferred into a separate savings account for PAYE/CIS each week.
For example, £2000 PAYE/CIS tax bill would be £500 a week towards your CIS/PAYE, this would be payable on the 22nd.
A common net profit margin for a construction business is around 10 - 15%. With the new Corporation Tax Rates, it is not as straightforward to calculate your corporation tax if your turnover is between £50,000 - £250,000 nevertheless you will need to take the average profit you normally hit/what you are predicted to hit and then multiply this by your corporation tax rate.
This is your estimated tax to pay at the end of the year, you can now divide this by 12 and have the money transferred to a savings account automatically each month.
From the first month of your new tax year, you should be putting money aside for your Corporation Tax.
A typical amount to take as a Company Director is £12,570 as a Salary (when Employment Allowance is available) and the remaining amount of £37,700 as a dividend should be taken (using the £1,000 dividends allowance). The tax on this set-up would be £3211 which would be the most optimal set-up and equivalent to a £70k PAYE job! We would recommend putting aside £267.58 per month for personal taxes. Any additional Dividends further tax planning would need to be taken.
🎉 That's a wrap!
I hope you found this useful! We know these finance ones can be a bit daunting but they are critical to the health of your business so it needs to be done! Don't ignore the VAT bill and then get hit with a surprising bill - Prepare and Plan!
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Frequently asked questions
This article has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.
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