How To Save Tax As A Self-Employed Person
Every year the spectre of submitting personal tax returns looms. The grey days leading up to 31st January. The scrambling around to get your books in order. The horrid realisation, that, once again, you forgot that the tax has to be paid as well as the returns submitted, before the 31st.
For nerds, this is no problem. Nerds annotate their underwear.
For the rest of us it's a chore and a bore, and for a few, a terrible temptation.
The temptation is to under-report your earnings to lessen your tax bill.
Who knows, you will probably get away with it. Maybe for a long time. But someday, you might not. Owing six years' of tax with interest and penalties is no one's idea of a fun time. While you're playing fast and loose, you might have a super time. When you're looking at a criminal record and bankruptcy, not so much fun.
But let's be clear. There's tax evasion and tax avoidance. The first is illegal and the second is not.
In our dumb, left-leaning, 21st century culture, where feelings trump reason, these can be easily and deliberately confused. I say deliberately because your government is desperate, and I mean desperate, to get hold of as much of your money as it can without causing a revolution. Those ministerial wheezes, those bureaucratic disasters have to be paid for somehow, you know!
Socialists view private businesses as cash-cows and repugnant capitalist enterprises, so they're quite happy if they are taxed into near-extinction.
Therefore, if Marks-And-Spencer Man can be hornswoggled into handing over his profits, all to the good for HM & Co. There is no moral obligation to pay tax, but there is a legal one; if you don't pay, the hammer comes down. It's the same legally as if you shoplifted a Post Office.
Here are 9 tips to legally cut down the amount of tax you pay as a sole-trader or self-employed person. Please note UK taxation rules are different for companies, than for individuals. It gets a little murkier if you are a self-employed director of a company, or an employee of your own company. That's when having an accountant who is not lax or stupid is handy!
1. Get a competent accountant
Note, I said competent. I didn't say clever, omniscient or expensive. A competent accountant knows what you can legitimately claim and not claim. If he gets conspiratorial and starts whispering about how you can play games with HMRC, get another accountant!
More here: https://www.registeredaddress.co.uk/blog/16-signs-of-a-bad-accountant/
2. Keep good digital records
You can't save on tax if you don't know what you're taking in and paying out. It can be as simple as a spreadsheet with sheets for Income and Expenditure.
A smart move is to have an online finance account, which is exclusively for your business, like your bank account or PayPal. These can let you download your statements as .csv files or other data format.
You can then import these into Excel and voila! You're half-way to getting your finances in order.
3. Claim legitimate allowances
Get your head straight about you can legitimately claim. Some entrepreneurs think they can write off dentistry and facelifts as legitimate business expenses. Wrong!
A more common one is travel expenses. Self-employed people think they can claim their travel expense to and from their principal place of work. Wrong!
If A is your home and B is your workshop, you can't offset the bus ticket from A to B. You can from B to C, C being the house where you are doing that plumbing job for Mrs. Nicelady.
Likewise, meals. Everyone needs to eat, regardless of whether they're jobless or earning millions. So you can't list your lunch as a legitimate expense.
Work from home? You can claim a small amount for utilities, but, hey, you live there, so you can't claim the entire gas and lecky bill!
Rather, look at outgoings for things which you buy which are essential to your job, which you wouldn't normally buy for yourself and which are not mainly for your private use: you're on safer ground then!
4. Employ relatives
Employees: They have a tax allowance as individuals; you pay them wages, which is a legitimate expense, and they don't have to pay tax if their income is less than £X,000 p.a., according to the latest HMRC tax allowances for employees.
5. Save into an ISA and ...
6. Pay into a pension
These diversions are not taxed, currently. Your government very much doesn't want to support you in your old age and so doesn't try to grab at your efforts to be independent of it.
7. Carry forward losses
Losses from Year 1 can be offset against taxes on gains made in Year 2.
8. Dividends vs. Salary
Someone who's an owner of their own limited company will have to work our the best ratio of salary to dividends which is the most tax efficient. This can vary according to the whim of the Chancellor of the Exchequer of that budget year.
I have refrained from giving specific tips, as these can change from year to year. Currently, both Left and Right agree that annoying businessmen is not a good long-term national strategy. The nation needs the income.
So there will opportunities to keep your tax outgoing down for the forseeable future.
9. Who needs to submit self-assessment returns?
- You were a company director;
- You received £2,500 or more in untaxed income from a sideline to your main PAYE job, or from your own business;
- You received more than £10k income from savings and investments;
- You made profits from selling things like shares, a second home or other chargeable assets and thus are liable for Capital Gains Tax;
- You had taxable foreign income;
- You received dividends from shares and you’re a higher or additional rate taxpayer;
- Your annual income was over £100k.
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