Your tax bill can be the biggest bill that you need to handle when you’re self-employed. But there are ways you can reduce your tax bill if you’re self-employed while staying on the right side of the tax man.
How to Reduce Your Tax Bill if You’re Self-Employed
Here I share with you 10 ways to reduce your tax bill. Although some allowances and reliefs can be claimed when you fill out your self-assessment tax return, others are time sensitive.
This means that some of the tax saving strategies I share with you here need to be executed before the end of a tax year to take advantage of them or wait until subsequent tax years to benefit.
When Does the Tax Year End?
The tax year ends on 5th April each year. So one complete tax year is 6th April to 5th April.
1. Bring Forward Capital Purchases
Self-employed business owners are entitled to claim Annual Investment Relief ‘AIA’ on tools and equipment of up to £200,000.
Basically, the AIA means the full amount of the capital purchase is tax allowable in the year it is bought, rather than using traditional capital allowances which spread the tax saving over a number of years.
If you are thinking about spending some money on capital purchases or assets in the future then, depending on your finances, you could bring this purchase forward to the current tax year. That way you will reduce your tax bill sooner rather than later.
2. Claim Your Cash Expenses
It’s easy to forget to claim for business expenses that you pay cash for during the year – writing them off as small and insignificant.
Believe me, these “small” amounts can mount up.
If you have a pile of receipts then make sure you go through them and make an expense claim.
Business-related cash expenses are often tax allowable, especially things like subsistence.
Making sure that you have claimed all your cash expenses will help to reduce your tax bill and get you some tax-free money.
3. Claim Business Mileage
Self-employed business owners are entitled to claim up to 45p per mile for the first 10,000 miles (25p thereafter) if you use your own car for business purposes.
This amount is repayable to you as well as being an allowable business expense.
Take a look back through your diary to see which clients you drove to and where they were.
4. Claim Pre-Trading Expenses
If this is your first year of being self-employed, then you may be able to claim for things you bought before you started officially trading.
This is a commonly overlooked year-end tax planning trick, even by accountants.
So make sure you make a note of any pre-trading expenses to discuss with your accountant if you plan to hire one.
Here are some examples of pre-trading expenses:
- Domain name
- Mobile phone
- Website build
If you are VAT registered, there are special VAT rules that allow you to claim back some VAT on pre-trading expenses.
5. Claim for Your Home Office Expenses
Another easy way to reduce your tax bill if you’re self-employed is to claim for your home office against your taxes.
If you rented an office space you would be allowed to claim for this against your taxes, so HMRC permits a claim if you choose to work at home.
HMRC allows you to claim for your home office in two ways:
- At a flat rate set by them, without needing receipts
- Using your actual costs of things like electricity and gas.
I’ve put together a Guide to Claiming for Your Home Office, where I explain each option and how you work out what you can claim.
6. Pension Contributions
When you are self-employed, you can claim tax relief on pension contributions of up to £40,000.
Opening a self-employed pension scheme is a commonly recommended tax planning tip by accountants.
If you have cash available, this can be a great tax-planning strategy to reduce your tax bill.
Watch out, you’ll only get relief on the amounts you have actually paid into your self-employed pension scheme during the tax year.
7. Employ Someone In Your Family
If you have a loved one who has supported you in your business but not been remunerated, then you could pay them a salary.
You’ll be able to reduce your tax bill because their salary is an allowable expense, as long as you can prove they have helped you.
There’s an added tax saving too if they have personal allowance available. And don’t forget they may need to fill out a tax return too even if they have no tax to pay.
8. Defer Income
Deferring income means that you can push out earnings from one tax year to the next one. That means your tax liability is also deferred to later years.
There are special rules around deferring income that you need to adhere to when year-end tax planning.
You can’t claim for deferred income if you have already delivered your product or service.
You can claim for deferred income if, for example, a customer pays you up front but you have not yet delivered on the project.
If you meet the criteria for deferred income then you’ll be able to reduce your tax bill. But beware you’ll pay for it in the following year.
9. Marriage Allowance
Depending on your
The HMRC Marriage Allowance lets one person transfer up to 10% of their unused personal allowance to their partner.
This is a potential tax saving of £1,185 for the tax year 2018/2019.
The HMRC Marriage Allowance is only available if you pay tax at 20% – it is not allowed if you pay tax at 40%.
10. Tax Losses
If you have made a tax loss in the previous tax year, then firstly don’t forget about it!
Secondly, consider how you will make use of this loss to help reduce your tax bill.
Depending on your circumstances tax losses can be used:
- Against previous years profits;
- To generate a tax refund;
- Set against future profits;
- Used against capital gains;
- Against future Class 4 national insurance.
Tax losses are an easily forgotten way to reduce your tax bill, so if you made a tax loss then dig out your previous years’ tax returns to find out what you are entitled to.
Anita is a Chartered Accountant with over a decade of experience taking self-employed business owners from financially confused to business savvy.
She is the creator of the ‘Go Self Employed’ website, which is her corner on the internet where she makes self-employment less terrifying.