Will you be ready for the tax man?

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Will you be ready for the tax man?

Creating a tax reserve plan can bring peace of mind and a clearer view of your overall finances. Graeme Morris explores simple steps for ensuring that the deadline for your next tax return comes and goes as painlessly as possible.

Given that even Albert Einstein once described filling out his tax return as “too difficult for a mathematician”, this may seem like a good time to forget the taxman for a while and focus on other things. But as you get to each new year, you’ll almost certainly thank yourself for having put a plan in place.

Most of our clients who own businesses, are self-employed or who qualify for capital gains tax have developed a tried and tested routine for managing their tax liabilities. But if this is a relatively new issue for you, or something you’ve not previously thought about in depth, there are simple steps that can help.

Act early

The first is to plan well in advance. Many of our clients have a permanent tax reserve account in place. Others realise it’s helpful when they come into an additional large sum of money, perhaps through the sale of a business or an inheritance windfall. In that situation, we would always suggest that you discuss the tax implications early on with your solicitor and your accountant.

Indeed, getting a decent estimate of your potential tax liability several months in advance, and adding a contingency fund, is a very good place to start. Then you are in a good position to set up and manage your reserve account. For many, the big benefit of this is simply peace of mind. With your tax liability covered, you are free to invest or enjoy the rest of your revenue as you wish. It also helps to provide you with a clearer view of your overall finances.

Make it work for you

Some of our clients prefer an instant access account for their tax reserves but most opt to ringfence it in a separate deposit account. Some like to pay a fixed monthly amount so that they can chip away steadily at their tax liability as the year progresses, while others find it more convenient to deposit lump sums in advance.

“Getting a decent estimate of your potential tax liability several months in advance, and adding a contingency fund, is a very good place to start.”

But whatever works best for you, if you are juggling significant sums of money, choose a bank that can offer a flexible and bespoke service to suit your circumstances. For instance, while many mainstream banks only offer a somewhat limited range of deposit term options, Hampden & Co can tailor a deposit account to any date up to a maximum of two years. That way, your tax reserves can be secured and earn interest until the very day you need them released to HMRC.