Why do we provide a tax estimate?
If you've ever been employed by someone else you'll be used to paying your tax through the Pay as you earn (PAYE) system, so what you get paid, is what you can spend.
But when you work for yourself, a portion of every pound you earn has to be paid over to the tax man.
You pay your tax over to the tax man once a year (or twice if you "pay on account"). It's important to budget for this to make sure you don't get caught out.
To help you do this, Coconut gives you a rough estimate of your tax that helps you figure out how much to set aside.
Using the tax estimate as a guide
Your tax estimate is based on the figures that you enter into Coconut and should only be considered a guide. Any income or expenses that aren’t captured in the Coconut app won’t be taken into account.
How we calculate it
We look at a few things to work out an estimate for your tax bill:
- Your business income
- Your allowable expenses
- Any information added to your “Tax Profile”.
We combine this with the tax rates and allowances that HMRC publish to work out a rough estimate for your tax.
Your Tax Profile
The Tax Profile lets you adjust your self-employed tax estimate for the following:
- Pre-Coconut Profit: To add any self-employed income or expenses you had earlier in the tax year before you had a Coconut account.
- Employment Income: If you have a job throughout the year where you pay tax through Pay-as-you-earn.
- Student Loan: If you're repaying a student loan.
- Property Income: adjusting for property income that you earn elsewhere.
- Personal Allowance: To adjust your personal allowance.
How accurate is the tax estimate?
The tax estimate will only be as accurate as your records stored in Coconut. To improve the accuracy of this feature, make sure that you check the categorisation on your transactions and ensure your “Tax Profile” is completed and up to date.
Getting your final tax bill from HMRC
Your exact tax bill will be calculated when you submit your tax return to HMRC at the end of the tax year which ends on 5 April. You should expect the final amount to be different to the amount shown in the Coconut app.
Watch out for Payments on Account
After you’ve done your first tax return, HMRC may ask you to make payments in advance for your tax bill on 31 January and 31 July.
Estimating PAYE payments
If you enter employment income into your tax profile, we estimate the amount of tax you will have paid through PAYE. This will vary from the actual amount paid, so this will make the estimate less accurate. Our goal is to improve the accuracy of these calculations over time, but make sure you use this estimate as a guide only.
If in doubt, ask for help
If you have specific questions about your tax affairs, you should speak to an accountant or tax advisor. For help with the tax estimate in the app, you can chat to our support team and we’ll try our best to help.