Learning from a Tax Bill

Tax Bill

Today I’m simultaneously celebrating and commiserating, I’ve just met with my accountants and have now got to pay Mr Taxman about £32K (~$61K) for last years profit and towards this year’s bill. It hurt (a lot) doing the bank transfer but hey it means I made a nice bit of money so I’ve got to celebrate that (I’m writing this with can of beer in hand before going to the pub for dinner).

There’s a couple of lessons I’d like to share from this, the first being if you’re drawing money out of your business for personal use make sure you put some of it aside for future tax bills. The way I do it is every month pay myself a decent wage out of my business account and then immediately transfer 40% it of that into a separate tax account, that way when the bill arrives I have enough set aside to pay it.

The other thing I’ve learnt from this is I don’t really need to pay myself what I currently do each month, most of it goes off into savings accounts which pay me a paltry 6% or so interest (which then gets taxed at 40%, bastards). So what I’d be much better doing is re-investing the money into existing or new sites (like what Scott wrote about yesterday). So as I intend to expand my network of sites this year I’m going to be giving myself a pay cut and re-investing the cash into content, advertising etc. With the long term aim being to grow and by doing so I’ll be paying a lot less tax in the meantime but building up my business assets and overall income.

On Thursday we have an interview with a famous contestant from Dragons Den, who refused 2 offers from the dragons and is still going from strength to strength. To see the interview first be sure to subscribe to our feed 🙂 it will be interesting to see if anybody can guess via the comments here who the character is.

About Al Carlton

Al quit the 9 to 5 rat race in January of 2007, before then he was a software engineer and systems architect of financial system. Nowadays Al spends the days running his various businesses and experimenting with different ideas and opportunities.
Al can be found on twitter at AlCarlton.

Comments

  1. Tax is a pain. I still need to work mine out for 2006-2007 and only have a few days left 🙂 I was 2 minutes late last year but didn’t get a penalty. I will probably sort it all out tonight.

    Would it be Ling who is being interviewed?

  2. Ouch! when you pay the taxman an amount of money that a lot of people would be happy to earn you know your doing ok Al 😉

  3. I’m so glad (in a way) that my tax bill was nowhere near yours Al, but on the other hand, I wish I’d earnt enough to have a tax bill that big. I will certainly have to be more disciplined and make sure I put enough into a savings account for next years tax as it was a little bit of a stretch this year. I hope my current sites, and any future ones, make that a bit easier.

  4. Alternatively, you could run most of your internet business through a company.

    You would pay 20% corporate tax on the profits, but can then limit what you withdraw from it to just below the 40% threshold. That way there would be no further tax to pay and your company has a cash balance which can be reinvested at an opportune time.

    If you get the balance of salary and dividends right there would also be no NIC to pay.

    • that is why I don’t like accounts, my brain gave up after ‘20% corporate tax’ 🙂

    • Thanks for the comment James. I am looking at splitting off a significant portion of my business in a limited company in the next month or so, my accountant said something similar to what you just have and if I can reduce my bill to the 20% mark I’ll be very happy.

      • I’d check out CG and not the website 🙂 (capital gains) fully first before going down that route if you have an exit strategy in the next few years, I was led to believe that limited companies pay capital gains at their full corporation tax rate if you ever sell up? Where as from April a small business pays 10% capital gains for the first million. Not 100% sure on it though so seek independant advice and all that.

        • Hi Scott, I won’t bore you with details but you can structure things so you only pay 10% on exit via a compnany also, and thats on the whole gain not just the first million ;-).

          At your earning levels you should both consider specialist tax planning advice. Your accountant can give a good steer but they, by necessity, need to know a little about a lot of things. Find a good tax planner, pay for an hour of their time and you could save significantly on tax now and in the future. No point paying the tax man more than you have to!

        • Nice info James, thanks, I do need to get myself someone local I can trust, a veritable minefield.

        • That sounds like good advice James, thank you. Like Scott I’m now looking for a tax specialist that U can trust and ideally meet up with.

  5. I’ve worked with guys that have to get loans out at the end of the tax year to pay their bills. Supposedly clever IT Staff!

  6. Ohhhh My god. 40% of the earnings…. What kind of laws are this man . What taxes… I am shocked. I suggest to have a offshore company , and with the savings from the company i advice to buy a car(:)) ) kiddin’

    • What’s wrong with my car 🙂 oh yeah it’s a piece of junk.

      In the UK we have different tax bands, 0%,10%,22% and 40% so I’d of paid a bit on each band but the majority of it would be in the 40% band due to the figures involved. I’m not sure if an offshore company would help as the UK government is really trying to tighten up any loopholes, it’s another question I’ll put to my tax consultant (when I find one).

  7. I like the idea of re-investing the money instead of putting it in a savings account. I’m trying that for the first time with the site I just bought for $2K. I’ll see if it pays off!

  8. 60% of something is betting than 100% of nothing eh!

    Hopefully i’ll figure out a way to manage my finances too as it is a big shock writing off so much money in one go. This is something I’m about to learn having registered as self employed in the UK and about to pay my first tax.. gulp!

Leave a Reply to James Cancel reply