Being a sole trader comes with many perks, one of which being the ability to pay less tax. However, it can be difficult to know exactly how this can be achieved, which is where we come in. As self assessment tax return accountants, we’ve helped countless freelancers and contractors to reduce the amount of tax they pay, so speak to us if you’re interested in learning more.
In the meantime, we have put together a few tips on what you can do to start chopping away at your tax bill.
Opt for a Limited Company
When you’re starting out, you may want to dip your toes into self-employment by becoming a sole trader. There are many benefits to being a sole trader, including being able to make your own schedule, set your rates and choosing who to work with.
However, once you start to grow your business or if you have a certain amount of annual profits, you may want to look into incorporating. Limited companies can be more tax-efficient because you can pay yourself a small salary and receive the rest in dividends, meaning you’re paying fewer national insurance contributions.
Limited company owners pay 19% of corporation tax while sole traders pay between 20% to 45%, depending on their profits.
Know Which Expenses You Can Claim
This is a big one too. As a business owner, you incur certain expenses, so make sure you record everything and claim everything you can. While you may not be able to deduct certain costs, you’re likely able to claim for things like stationery costs, mileage and parking, advertising and marketing, training courses related to your business, insurance costs and even employee salaries.
If you’re unsure what you can claim as allowable expenses, don’t hesitate to speak to a specialist accountant. As sole trader accountants and limited company accountants, we can easily advise you on what records to keep and which costs to deduct.
Join the Flat Rate VAT Scheme
While the scheme won’t benefit all contractors, since it will depend on your business, you might be able to take advantage of it and save some money when it comes to your taxes. For example, if you’re a new contractor and go for the flat rate VAT option, you can get a 1% reduction in your first year, which is a great help for those starting out.
In addition, you will have a reduced admin burden, as you only need to keep receipts as proof, not make tax calculations. You can’t reclaim VAT on your expenses, but you can do it on capital expenditure over £2,000.
Work Outside IR35 If Possible
Of course, this is not always possible. Some contracts will be inside IR35 but, if you have the chance, work outside of IR35 in order to save more money, as you won’t have to pay as much tax and national insurance contributions.
After April 6, the new IR35 updates to the private sector will roll out to medium and large businesses. The responsibility for determining IR35 status will fall on the end client or agency, so contractors will no longer be the only ones having to figure out the right tax and national insurance contributions they must pay HMRC.
You can read more about this on our IR35 Advice page or, alternatively, contact us for expert advice on all things IR35, including status determination.
Pay into a Pension Scheme
Another way to save money as a self-employed individual is to make pension contributions.
These payments are made from your gross pay before tax is taken out, which means a pension scheme can reduce your taxable income: if you make £80,000 a year but pay £10,000 into your pension, your taxable income becomes £70,000. The government will give you tax relief on the contribution based on your marginal tax rate.
If you are operating through a limited company, your company will get CT relief on the contributions for company employees.
Meet Your Deadlines
This may seem obvious but it’s still important to discuss, nonetheless. Submitting any tax returns late, whether a self-assessment or your corporation tax paperwork, will lead to fees and penalties, which can quickly add up and become expensive.
So, make sure you don’t miss your deadlines, keeping in mind that online submissions and paper submissions have different dates. If you’re self-employed, you must send your return by the 31st of January if you’re doing it online or by the 31st of October if sending it in the post.
Optimise Your Personal Savings Allowance
You can earn up to a certain amount of interest on your savings without having to pay taxes on it. If you’re a basic rate taxpayer, this value is £1,000. If you’re in the higher rate band, then your allowance is £500.
The interest covered by the allowance applies to bank and building society accounts, trust funds, life annuity payments, some life insurance contracts, company bonds, savings accounts, and more. If you don’t know whether you have to pay interest on your savings, we can help, so get in touch today.
Understand Capital Gains Tax Allowance
The capital gains tax (CGT) is the amount of profit you make when you sell investments like second homes and shares.
If you’re a higher rate taxpayer, you have to pay 28% on gains from residential property and 20% on gains from other assets. As a basic rate taxpayer, the amount of tax you pay depends on the size of the gain, your income and the type of asset you sold.
For the current tax year of 2020/21, the capital gains tax allowance is £12,300, so you only need to pay on gains over that amount. If you’re married or in a civil partnership and own the asset jointly, you can claim an allowance of £24,600.
You must use the allowance on the right tax year as, otherwise, you’ll lose the opportunity to do so. To find out more about CGT, check out our “How Much Capital Gains Tax Do You Have to Pay When Disposing of a Property” article.
Tax Relief for Landlords
As accountants for landlords, we work with many self-employed individuals who are either starting or who already have a vast portfolio. So, we know everything there is to know about taxes and tax relief for landlords.
For example, you may be able to deduct some costs from your taxable income if you have properties you rent out. You may also claim relief on money you used to replace items in properties that are furnished, like white goods. Keep in mind this only applies for replacements.
Donate to Charity
You’ll be doing a good deed while saving money at the same time, seeing as donations are tax-free. You or the organisation are able to claim the tax back through Gift Aid, so make sure your self-assessment tax return reflects this.
As always when you’re self-employed, keep records of everything – if you’re donating to charity, record the date and the amount donated, as you’ll likely need to refer to it when it’s time to pay taxes.
Use Accounting Software
Our FreeAgent accounting software helps you to stay on top of your accounts no matter where you are – or which device you’re accessing them from. You get 24/7, real-time access as well, ensuring you are always up to date with your transactions, expenses, receipts, and more.
This allows you to make informed decisions on your business more easily and helps you to save money by allowing you to see all allowable expenses, for example. For more information on this tool, talk to us.
Gorilla Accounting helps you maximise the tax-efficiency of your business, as we have many years of experience providing accounting for contractors. We’ll give you expert advice and assist in tasks like setting up your limited company or submitting your self-assessment.