As a self-employed person in today’s climate, you will know that working for yourself comes with ups and downs.
Running your own business and living life on your terms can be hugely rewarding, but you may have found that, financially, being self-employed involves a lot of groundwork.
It could be that having an irregular income, keeping tabs on your own records, and paying tax manually is challenging to fit into your busy life.
Luckily, when it comes to paying tax, there are ways to help mitigate the cost of your bill each year. Read on to find out five great tips for reducing your tax bill if you are self-employed.
1. Start planning now
According to the Telegraph, almost one-fifth of self-employed people missed the self-assessment deadline in January 2022. Indeed, as the cost of living crisis continues to tighten the UK residents’ finances, it is absolutely crucial to plan ahead for your next tax bill.
By working with your financial planner to figure out how much tax you will pay on your earnings from the 2021/22 tax year, and for any “payment on account”, you could begin saving money to pay this bill now, not later.
Planning ahead can help you maximise the tax reliefs you could be eligible for. Plus, staying organised could bring you the peace of mind that you will submit your self-assessment tax return on time, without placing yourself under additional financial strain.
2. Claim higher rates of pension tax relief
If you are a self-employed high earner, you can claim higher- and additional-rate pension tax relief through your self-assessment.
You will typically receive basic-rate tax relief of 20% on your personal pension contributions. This happens automatically, so you do not need to claim it through self-assessment.
Crucially, though, higher-rate taxpayers can claim a further 20% relief, and additional-rate taxpayers can claim an extra 25% relief on any contributions that are matched by income in those tax bands. However, this is not paid automatically, but must be claimed through self-assessment.
So, you could claim a total of 40% or 45% tax relief on pension contributions as a self-employed high earner.
Here is an example of how this can benefit you if you have at least £10,000 of income in the higher- or additional-rate tax band:
- As a basic-rate taxpayer, a £10,000 pension contribution will only cost you £8,000.
- If you are a higher-rate taxpayer, when you fill in your self-assessment form, you can claim an additional 20% relief. Now, your £10,000 contribution only costs you £6,000.
- As an additional-rate taxpayer, you can access 25% relief on top of the basic rate, so your £10,000 pension payment will only cost £5,500.
Despite the availability of valuable pension tax relief, research published by PensionBee in October 2021 found that, between the 2016/17 and 2018/19 tax years inclusively, higher-rate taxpayers missed out on £2.5 billion in unclaimed tax relief.
When the time comes to fill in your self-assessment form, it is crucial to make the most of the pension tax relief available to you. If you are unsure whether you are eligible for higher rates of pension relief, contact your financial planner for guidance.
Bear in mind that you can contribute and receive tax relief on personal contributions up to 100% of your earnings, or £3,600 if more, each tax year.
In addition, if your total pension contributions in a tax year exceed the Annual Allowance (£40,000 for most people) you will be taxed on the excess (unless the excess can be covered using carry forward).
3. Record and claim business expenses
When you are employed, you may be able to easily claim back expenses from your employer.
As a self-employed person, the task is a little different. You need to keep records of your business expenses and claim these through self-assessment at the end of each tax year.
Your business expenses could include:
- Professional equipment including laptops, office supplies, and materials
- Vehicle and transport expenses such as fuel used for work excursions, or train tickets
- Healthcare that pertains to your work, such as glasses
- Payments on a commercial property.
Your accountant will be able to advise you on exactly what expenses you can claim.
When you claim eligible expenses through self-assessment, this reduces the amount you are expected to pay Income Tax on. So, you can reduce your overall tax bill through expense claims.
If you diligently record your business expenses throughout the year, you are doing your future self a favour, as you can avoid the stress of searching for lost receipts before the self-assessment deadline.
4. Consider making charitable donations
Making charitable donations can reduce your overall Income Tax bill.
Indeed, you can deduct any charitable donations you have made throughout the year from your taxable income. This means that, if you have made sizeable donations to charity, you may pay less Income Tax as a self-employed person.
Through making these donations, you can make two positive changes at once. First, you are helping a cause close to your heart; second, you can reduce your Income Tax bill and put more of your wealth towards supporting yourself and your family.
When making donations to charity, it is important to keep records of these payments. That way, you can provide ample evidence for your charitable giving when you complete your self-assessment form.
5. Check your previous tax returns and claim rebates if you can
According to HMRC, as of the 2022/23 tax year, you can claim a refund on overpaid taxes for up to four years prior to the current year.
This means that, if you think you paid too much tax since the 2018/19 tax year, you can still write to HMRC and attempt to claim a refund.
If you have been self-employed for a number of years, it may be helpful to check your previous tax returns. This can be especially valuable if you are aware that you did not claim for certain expenses, charitable donations, or higher rates of pension tax relief.
If you have questions about this process, it may be constructive to discuss claiming refunds from HMRC with your financial planner. We can help.
Get in touch
If you are running your own business during the cost of living crisis, you do not have to bear this responsibility alone. Your financial planner can help you mitigate your Income Tax bill through self-assessment, in this and future tax years.
For guidance you can trust, email firstname.lastname@example.org or call 01625 529 499.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.