Being self-employed means understanding how to fill out a self-assessment tax return, how tax deductions work, and how to declare income correctly. Every penny is important when you set up on your own, and by getting to grips with finance you won’t just keep penalties at bay – you’ll also reduce your tax bill!
To help you start identifying ways to save, we have some guidance:
If you’re self-employed and pay tax at the higher rate of 40%, you can receive tax relief by topping up your pension, providing you declare these contributions on your self-assessment tax form. You can claim 20% tax relief on money put into your pension pot, on contributions up to the value of £40,000 every year. Plus, if you’ve forgotten to claim this in the past, it can be backdated over the past three years.
Incorporate your business
Whether you’ve just started out as self-employed or been an established solo trader for several years, it’s often worth looking into the possibility of incorporating your business.
As the size of your business increases setting yourself up as a limited company may give you the chance to save on tax. Directors of incorporated businesses can withdraw part of their earnings as dividends, which are subject to much lower tax rates (7.5% for basic rate taxpayers) than income tax.
Plus, dividends are free from tax altogether for the first £5000. While this will fall to £2000 in April 2018, it’s still a great tax-saving potential for the self-employed.
Claim all allowable expenses
Whilst completing your self-assessment form, you’ll be able to list all the expenses you make as a self-employed individual. HMRC offer tax relief to business owners, meaning you can claim money back for a variety of allowable work-related spends.
Understanding expenses is one of the best ways to trim your tax bill. These can vary depending on the nature of your business, but some examples include office equipment, electricity, travel payments (mileage, residence), legal costs, business insurance, uniform, and business group membership subscriptions, among others.
Use tax return software
No matter how many times you’ve punched in the necessary digits on your calculator and cross-referenced corresponding receipts, there’s always a chance you might have missed something. Thankfully, tax return software can pinpoint any error so you can rectify accordingly and send a faultless form to HMRC.
Quality self-assessment software can also help you to identify any potential savings that were missed first time around. It asks the right questions according to your occupation and provides sage advice as you go, ensuring precision from start to finish.