How to reduce your tax bill: Five top tips for the self-employed
With HMRC waiving late filing and late payment penalties for the self-employed until 28 February, Worthing-based accountancy firm, Carpenter Box, has five top tips to help people in the local area cut their self-assessment tax bill.
- Claim all allowable expenses:
You can deduct many business running costs from profits before calculating tax due. Which you can claim on depends on the size and nature of the business but include office equipment, travel, legal and financial costs, marketing, advertising and training courses. More information from HMRC is available here.
- Pay into a pension:
You need to set up your own pension if you’re self-employed and this comes with tax relief. In England and Wales, the government tops up every £100 you put in with £25 for basic rate taxpayers. If you’re paying the higher rate of tax of 40 per cent, there is more available to claim. To qualify you need to declare these contributions on the self-assessment tax form.
- Make a charity donation:
Adding charity donations to your tax return can reduce the bill if you’re paying at the higher rate of 40 per cent because you can claim relief. So, even if you are just sponsoring a friend through Just Giving, add this to your tax return.
- Set up an Individual Savings Account (ISA):
ISAs are tax efficient ways to save and invest money. There is no income tax payable on interest or dividends received and profits from investments are free of capital gains tax. You can put up to £20,000 per tax year into an ISA and there are various types, more information is available here.
- Incorporate your business:
This means setting up your business as a limited company, under which you will be classed as a director. It allows you to withdraw part of your earnings as dividends. The first £2,000 is tax free, after the rates payable to HMRC are lower than self-employed income tax (7.5% for basic taxpayers and 32.5% and 38.1% for higher and additional rate payers respectively). You are not always better off as a limited company and so you should seek advice before taking any action.
David Crowter, tax partner at Carpenter Box, said: “Due to the spread of Omicron, HMRC is waiving penalties for late payment, normally applicable after the January 31 deadline, for a month, effectively extending the deadline until the end of February.
“This means that this year, people who are self-employed have a little extra time to make sure they investigate, identify and take advantage of all available tax reliefs before submitting their return. So, we are urging them to do so.”
David emphasises that if people miss the February deadline, they will still be subject to financial penalties, which rise with interest, if they fail to pay.
Carpenter Box’s business advisers offer an integrated financial and tax advice service for individuals, business owners and professionals throughout the various stages of life.
For more information, please visit: www.carpenterbox.com