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Understanding Income Tax

What is Income Tax?

Income Tax is a tax that you pay on your income. For example, money earned from working for your employer, profits made from self-employment, rental income, and so on.

How do you pay Income Tax?

If you are paid by an employer, they will deduct taxes from your pay before you receive it. This is referred to as Pay As You Earn (PAYE).

If you earn any other types of income, you may need to file a Self Assessment tax return in order to declare and pay taxes on your earnings to HMRC.

For more information on Income Tax, visit HMRC.

How is Income Tax estimated?

Income Tax is calculated on the income you have earned, minus your allowable expenses. How much Income Tax you pay depends on; how much you earned above your personal allowance and how much of your income falls within each tax band. The standard personal allowance is £12,500, however, you may be entitled to a different allowance under certain circumstances.

For more information on Income Tax rates and Personal Allowances, visit HMRC.

We have recently launched our Estimated Income Tax feature. This can be found under the Taxes menu. We're going to continue expanding on this feature to cater for different business requirements, however as of now, the feature works best for sole traders who don’t have any disallowable expenses.

What if my income is over £100,000?

QuickBooks will calculate your estimated income tax based on HMRC's guide, whereby your personal allowance decreases by £1 for every £2 that your adjusted net income is above £100,000. This means your personal allowance is zero if your income is £125,000 or above. For more information on income over £100,000, visit HMRC's website.

QuickBooks will also calculate your estimated Income Tax if you're based in Scotland. Visit HMRC's website to learn more.

How can I estimate my Income Tax in QuickBooks?

  1. Connect your bank account and import your transactions
  2. Categorise and add your business income and expense transactions to your books
  3. Based on the categories you've assigned to your transactions, QuickBooks will will estimate your Income Tax.

What isn't included in the Estimated Income Tax calculation?

There are few items that won’t be taken into consideration when reviewing your Estimated Income Tax. We are working hard on improving this feature for our customers and any feedback you have is valuable to help improve our product. These items are:

Mileage deductions

When you enter mileage in QuickBooks, you will notice that this doesn’t automatically create an expense. Mileage deductions will need to be entered as an expense in your QuickBooks account for it to post to the Estimated Income Tax boxes.

Net VAT and CIS payments

Net VAT and CIS payments are not recorded as expenses in QuickBooks. To account for these, you will need to export your Income Tax Estimate report and add the net payments for the year outside of QuickBooks. One way to do this is to:

  1. Export your Estimated Income Tax from the Income Tax page.
  2. Run a report for your VAT/CIS payments made to HMRC.
  3. The total amount of these payments will need to be added to your exported copy of your Estimated Income Tax.
  4. Make adjustments to the calculated Estimated Income Tax with the additions of the payments made.

Tax allowance for vehicles and equipment

QuickBooks doesn’t have the ability to create fixed assets and deduct tax allowances against those assets and allowances. Please speak with your accountant to discuss how to account for these.

Other items that aren’t included in the Estimated Income Tax calculation but QuickBooks is hoping to introduce in the future:

  • Prepayments/payments made on account.
  • Current year and past year tax reliefs.
  • CIS deductions taken off by contractors.
  • Other taxes taken off trading income (for example, Capital Gains Tax, foreign income tax, tax paid on income from trusts).

Who needs to file a Self Assessment tax return?

If you are self-employed as a Sole Trader and earned more than £1,000, or are a partner in a business partnership you will need to file a tax return. You may also need to file a tax return if you earned any other untaxed income such as:

  • Money from renting out a property.
  • Tips and commission.
  • Income from savings, investments, and dividends.
  • Foreign income.

For more information on Self Assessment tax returns, visit HMRC.

Can I file a Self Assessment tax return in QuickBooks?

It’s currently not possible to file your self assessment through QuickBooks. However,  you can use the income and expenses information on the Income Tax page in QuickBooks to help generate an estimate of your income tax.

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