The Benefits of Doing Your Income Tax Return Early
Yes, I am talking about income tax returns in March!
The truth is I’ve already completed and filed tax returns for quite a few clients. Tax returns are an essential part of being in business and there is no escaping them. So you might as well get to grips with them and plan them around your schedule so you are not one of those people panicking all year about what ‘might’ be and stressing about the October deadline.
If you are a sole trader, have income outside of employment or are a proprietary director in a company, you’ll need to file an income tax return. This will be due by 31st October of the year after your trading year, i.e. by the end of October 2022, you’ll need to have filed your tax return for 2021.
So why should you be thinking about your income tax return now when there is plenty of time to deal with it?
Mostly because it’s better for you and your business rather than the tax man!
If your business is cyclical, you might have quieter months. This is the perfect time to work on your tax return with your accountant! Instead of worrying about business being quiet, use the time to be proactive and tick off one big annual item from your to do list.
At this stage of the year, you should also know how your business did in 2021. You should know your key figures like total sales, taxable profit, profit margin on your individual offerings and final cash position. If you are still in the dark about these key figures, you should be chasing your accountant for them!
Otherwise, your business could have performed very differently to how you imagined and you might be carrying on with activities and practices in your business that are costing you money and unnecessary time.
Remember, having access to your financial information on a timely basis, means that you can do more of what's working and stop anything that’s not working! It’s about taking quick corrective action so you can keep you and your business on track to reach your goals.
While you are looking at this, it’s the perfect time to gather the extra documentation you need for your tax return and close off the year in full.
Documentation will be easier to get a hold of, whether that’s bank statements or supplier invoices.
Any queries that your accountant has will be easier to answer as the information will be fresher in your mind.
You have time to chase up anything that isn’t readily available, like medical or dental expenses for your return
You’ll also have plenty of time to do a strategic review with your accountant on how your business performed and what your tax liability is made up of. This will be a drastic change if you are used to a last minute filing in October when everything is so pressurised that you normally just get your final liability without explanation and pay it without thinking!
You need to also think about cash flow. I ask all of my clients to put cash aside each month for their tax return liability. It’s proactive and having an amount set aside before you file your return takes a lot of the stress off.
However, if this is not you, doing your return early means you know your number. The dreaded amount you need to pay the tax man. You can plan accordingly so that you can pay the final balance by the October deadline. I have plenty of clients that will complete their income tax return in the Spring, but file it in the Autumn, allowing them the time to save the amount they need for their tax bill.
If you have had an unusual year and you think there might be complications with your return, even more reason to prepare your tax return early. This allows plenty of time for queries, adjustments and confirmations from Revenue if needed.
So, what can you do to be organised for your tax return?
The first thing you should do is block out time in your calendar in this month to get your paperwork together. Pull your estatements from the bank/stripe/paypal etc and request end of year statements from your largest suppliers at this time. Get working on bringing your bookkeeping up to date.
Gather details of all your other income, your medical expenses and anything else that might be needed for your return.
Talk to your spouse if you are jointly assessed and ask them to start gathering their information too.
Schedule a date with your accountant to pass on the information. Once a date is set, you’ll be more likely to get it done!
Open a second business bank account and call it your Tax account. Each month start transferring a percentage of your sales into this account. Put the reminder in your calendar so this is not forgotten. If you are unsure of what percentage to put by, speak to your accountant or look at your income tax return for the prior year.
I have a free income tax organiser that might help you with the information you need for your return, it is downloadable here.
Otherwise, I hope this information helps to get you more organised so that you have an easier tax return time this year. If this is something you need help with, as always, reach out for a chat!