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5 ways to reduce your tax bill when self-employed

Posted on 10th December 2018 by Caunce O'Hara

5 ways to reduce your tax bill when self-employed

When you’re self-employed it comes with many perks. But it also includes many challenges which are normally around tax. Every penny is important when you set up on your own, so you’ll most likely be wondering ‘how to reduce your tax bill?’

Getting a handle on your finances is key to paying less tax and avoiding penalties. To help you begin identifying how you are able to pay less money on your tax return, we have rounded up ways to cut down on tax for the self-employed:

Allowable expenses

When it comes to completing the self assessment form, you can list all expenses you made. HMRC offer tax relief on a variety of allowable work-related spends. Understanding which expenses, you are able to claim is a great way to minimise your tax bill.

Many self-employed have very little knowledge of expenses when starting out. Most self-employed will list expenses such as travel, office equipment and finance costs like bank charges or insurance. Bigger businesses are more likely to have more expenses like costs of business premises, staff and marketing, which then means they are able to claim on a wider range of expenditures.

Pay towards a pension

When you’re self-employed you will need to set up a pension yourself and from doing that you are then able to get tax relief. For a basic rate taxpayer, every £100 you put into your pension this will then be topped up with an additional £25 by the government.

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If you are paying the higher rate tax of 40%, then there will be an extra tax relief on top of this to claim. However, if you live in Scotland this is different, as the higher rate is 41% so you will get a little extra tax relief compared to taxpayers in the rest of the UK.

Make donations to charity

If you make enough profit to pay tax at the higher rate of 40% then adding any donations to charity to your tax return can reduce your tax bill. Whilst the charity benefits from the basic rate of tax relief higher rate tax payers can claim extra tax relief. So, if you sponsored a friend or relative through Just Giving or similar for a charity event make sure you add this to your tax return.

Incorporate your business

whether you’re just starting out as self-employed or have been recognised as a sole trader for a while, it may be worth looking into the option of incorporating your business, this will mean setting up your business as a limited company, and you’ll be classed as a director. It’s not only for those increasing in size, even if in your business it’s just yourself, you will have the chance of being able to reduce the tax you pay to HRMC.

According to HMRC, If you’re a director of a company, you are able to withdraw a part of your earnings as dividends, for the first £2,000 this is free from tax, after this, you will need to give money to HMRC, but the rates are much lower than that of self-employment income tax. For basic rate taxpayers this will be 7.5% and for higher rate and additional rate payers you would pay 32.5% and 38.1% respectively.

Use tax software

Our Self Assessment software gives you full visibility over your finances. You can see everything in real time and from any device, including your tax liability. It also provides you with tax-saving suggestions by revealing deductible items that will automatically save you money.

For information about Tax Enquiry & Legal Expenses Insurance or IR35 Contract Reviews, please contact our award-winning team on 0333 321 1403 or click for a quick online quote.

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The information in this article has not been written by Caunce O’Hara & Co Ltd or any of Caunce O’Hara’s employees. None of the opinions or views contained within this article are Caunce O’Hara’s nor do we accept responsibility for any financial advice given within the article.

Caunce O’Hara & Co Ltd do not provide Life Insurance policies nor advice regarding Life Insurance or accounting and bookkeeping.

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