Every year the deadline for submitting personal tax returns looms. The mad scramble to get your books in order. The realisation that again you have forgotten that the tax has ALSO to be paid as well as the returns submitted, before the 31st.
And then there's the expenses. The temptation to under report your earnings. Many do it. And may get away with it for a time. But that is tax evasion. It is illegal. If you are caught, bankruptcy and a criminal record are a distinct possibility. Not worth it.
Here are 8 tips to legally reduce the amount of tax you pay as a sole-trader or self-employed person. Please note UK taxation rules are different for companies than they are 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 a quality accountant is essential.
1. Get a decent accountant
A quality accountant knows what you can legally claim and not claim. You probably don't.
2. Keep good digital records
It's impossible to save on tax if you have no idea what you’re taking in and paying out.
A good move would be to have an online bookkeeping program. Just for your business that links to your business bank account. These let you download your statements as .csv files or other data format and with a few simple processes produce a pretty accurate state of affairs. And your accountant can have live anytime access.
3. Claim legitimate allowances
Be aware of what you can legitimately claim. There are so many second hand rumours about what you can and can't. A common one is travel expenses. Many self employed people think they can claim their travel expense to and from their principal place of work. And this is incorrect.
Another one is meals. We all need to eat, regardless of your place in society. So you CANNOT list your lunch as an expense.
Most people know they can claim for utilities if they work from home. Some people think they can claim the whole lot. You live there, so you can’t claim the entire amount.
Instead try to look at expenditure on things that are essential to your job, that you wouldn’t otherwise buy for yourself and are not mainly for your own private use.
4. Employ family
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 the latest HMRC tax allowances for employees.
5. Save into an ISA
6. Pay into a pension
These are not currently taxed.
7. Carry forward losses
Losses from Year 1 can be offset against taxes on gains made in Year 2.
8. Dividends vs. Salary
If you are an owner of your own limited company you will have to figure out the best ratio of salary to dividends which is the most tax efficient. This can vary year to year depending on the budget.
If you need further guidance give us a call and we will be pleased to help.
Cox Consultancy Accountants and Tax Specialists