Key ways you could reduce your tax bill as a self-employed professional

However, self-employment also comes with many challenges, some of which can take even the most organised and passionate of business professionals by surprise.

Many people start out on their self-employed career without fully understanding what being your own boss entails. Taxation and how to manage finances is typically the biggest issue that people find difficult to understand.

In 2020, over 700,000 people left it to the last day to submit their tax return, and more than 1.8 million missed the deadline altogether.

We 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

When you are required to complete your self assessment form, list all of the expenses payments you made. HMRC offer tax relief on a range of business expenses including marketing and advertising costs and travel expenses. There is a handy list available on Gov.uk on the self-employed expenses you can claim.

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

Working from home – If you work from home, you might be able to claim a proportion of the costs you incur. If you’re a sole trader or part of a partnership, you can calculate what you spend on these for work purposes, or you can claim a flat rate (simplified expenses). HMRC has more information on its website regarding the ways you can claim in relation to your circumstances.

Gift Aid - If you pay tax above the basic rate, you could claim tax relief (up to an additional 25%) on charitable donations you make using Gift Aid. You can get this relief on cash donations, and gifts of land, property or shares you make to charity.

Ticking the ‘Gift Aid’ box when donating means the charity can reclaim 20% tax back. If you pay tax above the basic rate of income tax, you will need to reclaim any further tax relief on your donation through your tax return.

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. For a basic rate taxpayer, every £80 you put into your pension this will then be topped-up with an additional £20 by the government (20% tax relief).

If you are paying the higher rate tax of 40%, then there will be an extra tax relief on top of this to claim. However, if you live in Scotland this is different, as the higher rate is 41% so you will get a little extra tax relief compared to taxpayers in the rest of the UK.

How do I claim higher-rate tax relief?

You can easily do this through your tax return. It’s important to include the gross value of your pension contributions. That’s the total of what you’ve paid in, plus the 20% tax relief from the government. The higher-rate tax relief will then either be paid to you directly, or HMRC will adjust your tax code or reduce your tax bill.

Some workplace pension schemes automatically reclaim basic-rate tax relief with any additional tax relief needing to be reclaimed through a self-assessment. Other schemes may do it all automatically. Workplace schemes which use salary sacrifice will 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 make enough profit to pay tax at the higher rate of 40% then adding any donations to charity to your tax return can reduce your tax bill. Whilst the charity benefits from the basic rate of tax relief higher rate taxpayers can claim extra tax relief. For example, if you sponsored a friend or relative through Just Giving for a charity event, add your donation amount to your tax return.

You could incorporate your business

Whether you’re just starting out as self-employed or have been a sole trader for a while, it may be beneficial to incorporate your business. Incorporation will mean setting up your business as a limited company, and you’ll be classed as a director.

As a limited company you will have the chance of being able to reduce the tax you pay to HRMC. According to HMRC, if you’re a director of a company, you are able to withdraw a part of your earnings as dividends, for the first £2,000 this is free from tax, after this you need to give money to HMRC, but the rates are much lower than that of self-employment income tax.

For basic rate taxpayers this will be 7.5%. Higher rate and additional rate payers would pay 32.5% and 38.1% respectively.

It is advisable to speak to your accountant or business adviser about incorporation, so you fully understand the ramifications of it before you go limited.

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

You can claim a refund for any overpayments you’ve made in the last four tax years. So, make a note if you stumble across something you could’ve claimed for previously, or if you spot a mistake in previous years’ tax returns.

When writing to HMRC to explain you’re making a claim for ‘overpayment relief’, you’ll need to include the following:

• 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
• How you’d like the repayment to be made

Sources:

www.caunceohara.co.uk/5-ways-reduce-tax-bill-self-employed

www.gov.uk/expenses-if-youre-self-employed

Disclaimer:

Please note, Markel Direct are not tax experts. This article has been written to provide an idea of the measures you can take as a self-employed professional to mitigate your tax liability.

For expert advice regarding taxation you should speak to your accountant or financial adviser.