Ways to reduce your tax bill whilst self-employed

Ways to reduce your tax bill whilst self-employed

Gerry O’Boyle and associates are Accountants from Bangor and Newtownards forming O’Boyle Accounting & Taxation, specialising in saving tax and other costs for small businesses. We also prepare Accounts and Tax returns for small companies and offers practical advice in running a business. Our team consists of good problem solvers and always looks at the most practical (cut to the chase!) way to achieve the best results.

Self-employment offers many perks, such as freedom and autonomy. However, it also brings challenges, some of which can surprise even the most organised and passionate business professionals. Many self-employed individuals start without fully understanding the responsibilities of being their own boss. Taxation and financial management are often the biggest difficulties.

In this blog, we will look at some of the ways you can potentially reduce your tax bill as a self-employed professional.

Claim all your allowable expenses and extras

List all expenses you made when completing your self-assessment form. HMRC offers tax relief on various business expenses, including marketing and advertising, and travel. A handy list of self-employed expenses you can claim is available on Gov.uk.

Understanding which expenses you can claim is a great way of minimising your tax bill.

If you work from home, you can claim a proportion of work-related costs. Sole traders and partners can calculate work-related expenses or claim a flat rate. HMRC provides more information on claiming based on circumstances. If you pay tax above the basic rate, you can claim tax relief (up to an additional 25%) on charitable donations using Gift Aid. This relief applies to cash donations and gifts of land, property, or shares to charity.

Contribute towards a pension

When you’re self-employed you will need to set up a pension for yourself. In doing that you are then able to claim tax relief.

How do I claim higher-rate tax relief?

You can easily include the gross value of your pension contributions in your tax return. This includes the total amount you’ve paid in, plus the 20% government tax relief. The higher-rate tax relief will either be paid directly to you or adjusted by HMRC, reducing your tax bill. Some workplace pension schemes automatically reclaim basic-rate tax relief, while others may do it all automatically. Salary sacrifice schemes automatically grant tax relief at your highest marginal rate.

If you are unsure, it is advisable to contact your pension provider to check the rules and details of your pension plan.

You can make donations to charity

If you earn enough to pay tax at 40%, adding charity donations to your return can reduce your tax bill. While charities get basic rate tax relief, higher rate taxpayers can claim extra relief. For instance, if you sponsored a friend or relative through Just Giving for a charity event, include your donation amount on your return.

You could incorporate your business

Whether starting out as self-employed or a sole trader, incorporating your business may be beneficial. It sets up your business as a limited company, classifying you as a director. As a limited company, you can reduce tax to HMRC. As a director, you can withdraw earnings as dividends, with the first £500 being free from tax. After that, you pay a lower rate than self-employment income tax. Corporation tax is not much better than income tax especially with the increase in the dividend tax rate. Unless a sole trader has quite a high profit, it isn’t always the best move beneficial tax wise to convert to a LTD. However every business is difference and O’Boyle Accounting will work with you to make sure you get the best tax benefits and savings from your company structure – and it might not mean operating as a limited company

You could correct and claim ‘overpayment relief’ against previous tax years

You can claim a refund for overpayments in the last four tax years. Note any potential claims or mistakes in previous returns.

When claiming ‘overpayment relief’ from HMRC, include the following:

• How you’d like the repayment to be made
• Proof you’ve overpaid tax through self-assessment
• Signed declaration saying the details you’ve given are correct and that you haven’t previously tried to reclaim the refund in question