While being a freelancer or contractor in the UK comes with many tax obligations, you also have several tax allowances you can claim when self-employed. As contractor accountants, we’re always happy to help you figure out the reliefs you’re entitled to – and how to claim them.
You can get in touch with us for specialist contractor tax advice but, in the meantime, take a look at all the different ways you can reduce the amount of tax you’ll need to pay.
Your Tax Obligations
First and foremost, you’ll want to be aware of your responsibilities as a business owner. When you become a sole trader or limited company owner, you must keep in mind that you’ll be taxed differently, something that can make things more complicated.
Hiring an accountant can help you stay on top of your records and taxes and help you to pay the minimal amount of necessary tax. As limited company accountants, we’ll help you to become more tax-efficient when it comes to all the taxes you must account for, which include:
Corporation Tax
If you’re setting up a limited company, remember that you’ll have to pay corporation tax on your annual profits. For the tax year of 2021/22, you’ll be charged at 19% but, in 2023, companies with profits of more than £250,000 will be taxed at 25%. Companies with profits of up to £50,000 will continue to pay corporation tax at 19% and there will be a marginal rate in between.
VAT
Companies with an annual turnover of more than £85,000 must register for VAT, although the government suggests that companies that don’t meet this requirement can register as well. Currently, VAT is charged at 20% for most services. However, a reduced rate on hospitality applies until 31st March 2022.
National Insurance
Another important part of your tax obligations is paying National Insurance Contributions (NICs), which are payable on salaries, not on dividends. If you’re a sole trader, you’ll pay Class 2 NICs if you have, at least, £6,515 in profits. If you make over £9,568 a year, you’ll also need to pay Class 4 NICs. Companies pay Class 1 NICs on the salaries paid to their employees.
These figures are for the current tax year.
Income Tax
You also have to pay tax on your income. The government considers different rates, depending on how much you make a year. For 2021/22, these are:
- 0% – Up to £12,570
- 20% – Between £12,571 and £50,270
- 40% – Between £50,271 and £150,000
- 45% – Over £150,000
It is also worth noting that your personal allowance will start to be removed once your income exceeds £100k by £1 for every £2 over this amount.
Claim Expenses
You may be entitled to claim back certain expenses, so this is definitely something to consider when doing your taxes. While it will depend on your individual circumstances, you can generally claim for things like equipment costs, business insurance, travel, accommodation, marketing costs, and more.
We’ve written a handy limited company guide to expenses that can help you to figure out what you can claim back. You can also check out our guide for self-employed expenses or give us a call if you want to ask about your specific situation.
Know Your Personal Tax Allowance
As mentioned, you must pay income tax on your annual salary. However, you have a personal allowance up to £12,570, which means you only start paying tax when you go over this amount. Being aware of this number can help you manage your accounts better because it allows you to better understand your personal finances.
We’re sole trader accountants with a lot of experience helping self-employed individuals streamline their accounts and taxes, so we’re happy to answer any questions you may have about this tax-free allowance or any other matter.
Keep Your Dividend Allowance in Mind
This one is for limited company directors, since sole traders can’t be paid in dividends.
Limited company profits, after tax, can be distributed to shareholders as dividends, so you have the opportunity to pay yourself a salary and draw dividends, making the most of your take-home pay (we’re written more about paying yourself as a limited company on our blog page, so give it a read or chat to us for more information).
After all, if you’re paid a salary through your limited company, you have to pay income tax and National Insurance Contributions, whether the same doesn’t happen with dividends. You can only draw them if there’s profit, not as a normal wage, so make sure to keep that in mind.
We know all there is to know about contractor dividends, so, as your accountants, we’ll help you to maximise your profits no matter the size of your company.
Reduce Corporation Tax
There are many ways to go about this, some of which we covered in our article “How to Reduce Your Corporation Tax”. As a limited company owner in the UK, you’re probably looking for ways to save money on your business, and this can be a good way to go about it.
Cutting your corporation tax bill by hundreds or thousands of pounds can be achieved by claiming mileage, paying HMRC early, complying with deadlines, contributing to your pensions, buying things through the company, just to name a few.
Consider the Married Couples’ Allowance or Marriage Allowance
According to HMRC, this allowance can reduce your tax bill by between £353 and £912.50 a year, but you can only claim it if you’re married or in a civil partnership, living with your spouse or civil partner, and you or your partner were born before 6 April 1935. For 2021/22, the maximum allowance is £9,125.
People born on or after this date may be able to claim Marriage Allowance, which allows you to move £1,260 of your personal allowance to your partner, reducing their tax bill by up to £252.
Work Outside IR35
Looking to avoid IR35? This key legislation has been a headache for many people in both the public and private sectors, so it’s fair to say it’s not popular. It’s not difficult to see why. Not only is this a complex legislation, but it can also force business owners to pay fines and taxes they didn’t think they had to pay in the order of thousands of pounds – or more.
If your contract is inside IR35, your income should be paid via a deemed salary subject to PAYE. If you’re a medium to large company in the private sector, the end client or agency are also now responsible for determining your IR35 status.
If you’re not sure whether you’re inside IR35 or don’t know what to do if you are, speak to us – we can offer expert advice on all matters, including the intermediaries’ legislation.
Make Pension Contributions
Working for yourself takes up a lot of time, so you may not have sat down to plan for retirement. However, it’s important to prioritise this because you’re investing in your future. Making contributions to your pension pots also helps you to get some tax relief, so what are you waiting for?
When it comes to pensions for limited company directors, you make contributions as a company that are classed as business expenses (so they can be deducted from your corporation tax). These contributions leave your account before tax is calculated, meaning you can offset it against your company profits. If your profits are lower, so are your taxes.
The state pension will rise by 2.5% this tax year, an equivalent to an increase of £228.80. The lifetime allowance, which is the amount you can put into private pensions before paying a fee, will stay at £1,073,100 until 2026.
Claim Research and Development Tax Relief
Another thing to consider is the research and development tax relief for SMEs. Companies research and develop products, services and processes in order to gain a competitive edge over other businesses in their sector or as part of the services they provide. There’s a lot of risk involved in this, however, because projects may not turn out the way business owners expect them to turn out, resulting in a financial loss.
With this tax credit, companies can breathe a little bit more easily, since up to 33.35% of the research and development that you invest can be claimed as a reduction in corporation tax or as a cash repayment.
Another benefit of this tax relief is how it encourages innovation, allowing UK businesses to grow and to continue their massive contributions to the economy. To qualify, you must be part of a project that seeks to advance science or technology and has to relate to your trade.
If you undertake research and development in your company, you may be able to claim it. If you’re unsure how to claim this research and development relief, we can help.
Make Charitable Donations
Donating to charity will give you some tax relief as well. So, not only are you participating in a good cause, but because donations are tax-free, you can claim the tax back through Gift Aid. So, add this to your self-assessment tax return.
Keep records of your donations, including the amount you’ve given, in case you need to refer to it when paying your taxes. The donation of certain assets to charity can offer income tax relief as well. These gifts include shared in OEICs (open-ended investment companies) and listed shares and securities.
For more sole trader tax advice, talk to us, explore our blog page or browse our website for information.
Claim Tax Relief as a Landlord
You may be able to use the Rent-a-Room scheme to earn up to £7,500 before tax. This is only possible if you’re letting a room, not the whole property, and allows you to claim for the replacement of items like beds, sofas, curtains, cutlery, etc.
Because we’re accountants for landlords, we can speak to you in more detail about the rooms or properties you own, so contact us today.
Look Into Your Personal Savings Allowance
Many people are not aware of this, but you can actually earn up to a certain amount of interest on your savings without paying taxes on it. As a basic taxpayer, this figure is £1,000, while higher rate taxpayers have a £500 allowance.
The allowance applies to things like banks and building society accounts, company bonds, savings accounts and trust funds.
Reducing tax as a sole trader is important for self-employed individuals, whether they’re just starting out or have several years of experience. Gorilla Accounting is here to help you navigate the complex world of UK taxes, so get in touch if you’d like to learn more.
There are many other allowances and tax reliefs you can get when you’re self-employed, but we understand that keeping on top of them all can be a challenge, especially when you’re busy growing your business.
This is where we come in. You don’t have to do it all yourself, as our dedicated accountants will work with you to ensure you follow all deadlines and all returns are submitted correctly, so that you can benefit from a lower tax bill.
