Self-Employed Tax: Tips for Saving
Author: Russell SmithSeptember 5, 2016
Take the advice of our chartered accounts in Leeds and discover how you can legally reduce your self-employed tax bill.
They are the bane of a self-employed person’s life, little financial drains slowly chipping away at your earnings.
I’m sure you don’t have to imagine this scenario: you get paid for a contract, you see the nice healthy sum sitting in your bank balance, then your heart slowly sinks as you realised about 20% doesn’t even belong to you.
But there is nothing you can do, right? Tax belongs to the tax man. You can’t hide from that unless you branch out into illegal activity.
Well, that isn’t exactly true.
There are plenty of ways you can legally save money on your self-employed tax, so let’s take a look at the most important factors in helping you save some cash.
Take Advantage of Tax Deductibles
Tax deductibles are probably the easiest method of immediate tax relief, yet many business owners simply forget or don’t bother to take full advantage of them.
Tax deductibles are items you’ve paid out for as part of running your business that can be added back to your tax return, to increase the amount of non-taxable income you can earn.
For example, the current tax-free allowance for a sole trader is £11,000. If you buy a £400 laptop for your freelance business, you can increase that tax-free amount to £11,400. You won’t save every penny you put into that laptop, but you’ll save a healthy chunk.
A tax-deductible can be anything that is ordinary or necessary for business operation. Some tax deductibles are obvious, like computers for software engineers and tools for builders, while others are not so obvious. Check out our article on five easily overlooked self-employed tax deductibles to make sure you’re in the know.
When claiming tax deductibles, you must have evidence of the transaction, so be sure to save receipts and invoices if you want to make claims.
Save Self-Employed Tax By Setting Up a Pension Plan
It’s important that present-day you does not forget about future you.
In the moment, when you’ve got bills to pay and you see money coming in, it can be tempting to ignore savings in favour of looking after present-day you.
But this isn’t a good idea.
Not only will you be depriving yourself of a healthy nest egg come old age, but you’ll also be needlessly paying out money to the taxman that could be sitting in your pension pot.
Pension claims are a little complicated, but we’ll try and keep it simple.
Pensions are not taxable, although your payments will initially be taxed. Here’s an example:
Let’s say you want to save a pension of £10,00 in a year. £40,000 is the maximum amount allowed per annum. You put that money into a private pension plan and it gets locked away until retirement. Your tax return then comes around and you pay tax on that £10,000 as part of income tax. However, your pension provider then claims back the tax you paid on that £10,000 and adds it directly to your pension.
You yourself do not have access to that pension until you retire, but it is still your money. You’ve saved money on your tax returns and you’ve made plans for future you.
Bring a Spouse or Partner Into the Business
In relationships, it is often inevitable that one person is earning less than the other.
This isn’t something most people give a second thought to, but it is something you as a self-employed worker should be fully aware of.
HMRC allows you to set up business partnerships. Similar to sole traders, they incur a small amount of extra paperwork but basically work in the same way. You are self-employed, you manage your own business and finances, but you don’t operate like a limited company.
However, as there are two of you, you can split the profits.
If your partner is a homemaker, this is an incredibly tax efficient method. You can utilise their £11,000 tax-free allowance in combination with your own, saving your family a heap of money.
However, even if they are earning, you can still save money. Let’s say your partner is earning £22,000 and you are earning £36,000.
They are paying the basic 20% tax band while you are paying 40% on anything up to £32,000. However, if you shift £4001 over to their income as part of your partnership, you’ll both be paying the lower tax bracket, slashing your tax bill.
Claim Back Charitable Donations
Many people, self-employed or not, give to charity.
Most people won’t be filling out their tax returns, so they won’t be seeing any return from such a gesture, but you as a self-employed individual can.
Money donated to charity can be claimed on in your tax returns, reducing your tax bill in exactly the same way a business deductible would. These savings are likely to be considerably smaller than your company costs, but they are still self-employed tax savings nonetheless.
Are you looking for specific, tailored advice on how you as an individual can save on self-employed tax? Contact our chartered accountants in Leeds today.
Russell Smith is an award-winning accountant and founder of RS Accountancy. With over a decade of experience running his company, he has worked with countless small businesses just like yours, helping them grow profits and manage their finances. Russell is also a prolific financial writer, having contributed to such publications as The Guardian, The Telegraph and The Daily Mail.