The increase in self-employed individuals is one of the most remarkable stories of the British economy. There has been a 40 percent increase in solo traders since the past two decades. Around one in six individuals in the UK, today are self-employed.
If you are one of the individuals who has gone solo and set up your own business, this post is written for you. Here we have listed five strategies that can help self-employed individuals pay less on taxes.
1. Claim Every Single Penny
HM Revenue & Customs (HM&RC) allow generous tax breaks to self-employed individuals. You should make the best of this opportunity and reduce cost by claiming every single penny in running your business. There are many little items of expense that can add up to hundreds of pounds in tax savings. You can claim a lot of business expenses such as:
- Utilities (Lighting, Heating, Water)
- General maintenance
Make sure to talk to a professional accountant for self employed to know more about claimable business expenses.
2. Charitable Donations
Not many solo traders know that they can save a lot on taxes by making charitable donations. This is a particularly effective strategy if you fall into a higher tax group. You can claim tax relief on the difference between the basic rate and the higher rate. For instance, if you have donated around £10, you can get £2.5 tax relief. You need to record the donations in the main section of the tax return to claim tax exemption.
3. Work from Home
You cannot claim travel expenses from your home to work. A turnaround for this restriction is to work from home. As a result, when you go outside the home, you are travelling for business for which you can deduct taxes. You can claim travel expenses incurred in going to meetings with business partners and clients. Whenever you travel to the place that is other than your home for business purposes, the travel expense will be tax deductible.
4. Maximize Capital Allowance Claim
You should maximize the capital allowance claim by consulting with your accountant. Capital allowances are calculated based on specific rates. For instance, 100 percent of plant and machinery costs of up to £250,000 can be claimed on the first year of purchase. For capital assets above £250,000, around 18 percent can be claimed on the first year while the remaining balance will be written down by the same rate each year.
To maximize the tax savings from claimable allowance, you should consider purchasing the asset one or two weeks before the end of the financial year. This will improve the cash flow position due to which you don’t have to resort to costly loans.
5. Split Business Personality
When you set up a limited liability company, you will have to pay taxes at a lower rate. Income tax rates in the UK for solo traders and partners range from 0 to 47 percent, depending on the income. However, the tax rate for companies in the UK is just 20 percent on all profits. So, you can potentially lower your tax rate by turning your sole proprietorship business into a limited liability company.
However, there is a catch. You will incur more administrative fees with a limited liability company. The best option, therefore, is to split your solo business into two different businesses. One should be run as a sole trader and the other as a limited liability company. But it’s important that you take this step carefully preferably with the advice of a professional self-employed accountant.
The above tips can help you to greatly reduce your tax bill if you are self employed.
An important point to keep in mind is that there is a difference between tax reduction and tax avoidance tactics. There is a thin line between tax reduction and avoidance: the former is legal while the latter could lead you into hot water.
A qualified self employed accountant can help you devise a clean and effective tax reduction strategy. Hiring the services of a self-employed accountant will help you to know how to reduce taxes in a manner that won’t land you into legal troubles.