The increase in self-employed individuals is one of the most remarkable stories the British economy has to offer. There’s been a 40 percent increase in solo traders in the past two decades. Today, around one in six individuals in the UK are self-employed.
If you’re one of the individuals who went solo and set up your own business, this post is for you. Here we have listed five strategies that can help self-employed individuals pay less on taxes.
1. Claim Every Single Penny to Pay Fewer Taxes
HM Revenue & Customs (HM&RC) allows generous tax breaks to self-employed individuals. Make the best of this opportunity. Reduce costs by claiming every single penny in running your business.
There are 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:
- Traveling
- Cleaning
- Utilities (Lighting, Heating, Water)
- Rent
- General maintenance
Make sure to talk to a professional accountant for self-employed people. This helps you know more about business expenses that should be claimed.
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2. Charitable Donations
Not many solo traders know they save a lot on taxes by making charitable donations. This strategy works 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, when you donate 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 and Pay Fewer Taxes
You cannot claim travel expenses from your home to work. A turnaround for this restriction is to work from home. When you go outside the home, you are traveling 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 a place that’s other than your home for business purposes, the travel expense will be tax-deductible.
4. Maximise Capital Allowance Claim
You should maximise 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. That can be claimed in the first year of purchase. For capital assets above £250,000, around 18 percent can be claimed in the first year while the remaining balance will be written down at the same rate each year.
To maximise the tax savings from the claimable allowance, you should consider purchasing the asset one or two weeks before the end of the financial year. This improves the cash flow position. You don’t have to resort to costly loans as well.
5. Split Business Personality
When you set up a limited liability company, you’ll pay taxes at a lower rate. Income tax rates in the UK for solo traders and partners range from 0 to 47 percent. It depends on income.
However, the tax rate for companies in the UK is just 20 percent of 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 to take this step carefully preferably with the advice of a professional self-employed accountant.
The above tips can help you 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 in legal trouble.
Are you looking for professional tech-savvy tax advisors and accountants in the UK to guide you? Contact us now!
