20 Jul Ten Tax Saving Tips for the Self Employed
Self assessment can be pretty daunting for the newly self employed or even for those who have been self employed for some time and have muddled through! Make sure you’re claiming for all expenses that can be offset against your trading income in order to minimise your tax bill.
Generally, you can claim for expenses incurred that are “wholly, necessarily and exclusively” for the purposes of your work. Even if they’re not incurred exclusively for the business because there is a mix of both personal and business use, you may be able to claim the business proportion – check with your accountant.
Here are some general guidelines:
1. Use of Home. You can claim £4 per week for the additional costs that are incurred by running your business from home. Alternatively, you can claim a proportion of the actual household expenses.
2. Mileage. You can claim 45p per mile (for the first 10,000 business miles) that you travel in your own car. Alternatively, you can claim capital allowances (a form of tax relief spread over a number of years) and a proportion of motor running costs including fuel, insurance, servicing and repairs in accordance with business usage.
3. Telephone. Many self employed individuals utilise their home telephone lines in their business. You can claim a proportion of the line rental and broadband costs in accordance with the level of business usage. Also, keep a note of the telephone calls made and you reclaim the calls as an expense too.
4. Year end accruals. At the end of the tax year, you may have received goods and services within your business that you haven’t actually paid for so they aren’t recorded in your accounts. Keep a record of these expenses as you will be able to charge these to your accounts for the year – this increases your expenditure and therefore reduces your tax liability.
5. Trading Losses. It is normal for new business to make losses in the early years of trading. These losses can be offset against future profits to reduce your tax liability. Other options are available for relieving losses so discuss these with your accountant to establish which is most effective for your personal circumstances.
6. Expenses. Many business owners don’t realise that they can reclaim all expenses that are incurred wholly for the business – these include advertising, accountants fees and office supplies. Business expenses incurred up to seven years prior to trading actually commencing can be claimed too if these expenses were solely for the future business purposes.
7. Capital expenditure. When you purchase expensive items such as tools, equipment, vans or computer equipment, although you cannot claim the purchase cost as an expense, you can obtain capital allowances which will reduce your tax liability. Capital allowances are a form of tax relief which are spread over a number of years.
8. National Insurance Contributions. You will be required to pay Class 2 National Insurance contributions of £2.95 per week when you’re self employed (2018/19) and if your profits are over £6,205. If you’ve been both self employed and employed for a period of time, check that you haven’t overpaid Class 1 national insurance contributions as you may be able to defer Class 4 contributions.
9. Avoid Penalties! Your annual accounts and self assessment tax return should be prepared in advance of the tax return filing deadline which is 31 January. Late returns and tax payments are subject to penalty fines and interest charges and should be avoided.
10. Seek professional advice. Take advantage of the skills of a qualified accountant, with their experience they may be able to find legitimate ways for you to pay less tax and save you money. You may find that the tax savings obtained outweigh the accountant fees. Also, you’ll avoid the risk of incorrectly calculating the tax due and missing the tax return filing deadline!