Being self-employed has many perks, such as having control over your profits, your work schedule and your rates. But it doesn’t come without its struggles too, and one of those things can be taxes. When you go it alone, you don’t want to pay a penny more than you have to when it comes to paying your tax bill, so how do you save as much as possible? This article will be a guide on how to reduce your tax bill. We’ll dive into the following areas to show how you can shave off some extra pounds and pennies:

  • Change to a limited company
  • Understand your allowable expenses
  • Pay into a pension

Change to a limited company

Whether you have been trading for a short while or are a well-established sole trader, one of the first ways you could reduce your tax bill would be to incorporate your company. This is the process of setting up as a limited company instead of a sole trader.

When the business becomes a limited company, you become a director and employee of the business, not just a self-employed individual in HMRC’s eyes. Though you’ll still have to submit the businesses tax returns, you will be able to pay part of your earnings as dividends to yourself. The first £2,000 you receive in dividends is free from tax altogether. 

After the first £2,000 in dividends, you’ll have to start paying 7.5% tax on the money, but this is lower than the tax you’d be paying on your income tax self-assessment, which you’ll have been doing as a sole trader which sits at 20%. 

Becoming a limited company does come with other responsibilities, though, as well as the tax benefits. You’d have to submit annual financial statements that are visible to the public, as well as having other tax responsibilities such as Corporation Tax. You might require an accountant for the other financial reports you have to produce, but this might be a worthwhile investment if you are looking to grow the business and give off a more professional image.

Understand your allowable expenses

When you’re filling in your self-assessment, you only pay tax on the profit you’ve made after taking off any costs that it takes you to run the business. These are called expenses, and there are potentially other allowable expenses you are unaware of that you can claim back to pay less tax.

Here are some expenses that you may already know about:

  • Travel costs, such as petrol, public transport tickets, parking or hotels.
  • Office equipment such as laptops, pens, paper, chairs, desks or even a coffee machine.
  • Equipment or tools that are necessary to the business. For example, gardening tools if you are a landscaper.
  • Insurance for your business, as you might be legally required to have policies in place depending on your operation.

But you should read up on the other expenses you are allowed to claim as part of running your business. If you are already paying for these, then make sure you claim it back on your next self-assessment to save a little more on the tax front:

  • Working from home expenses. This can include your heating or utilities, Wifi costs, or a mobile phone bill as long as the purpose is “wholly and exclusively” for the business. This means you can’t claim back a percentage of your personal phone bill if you use it for business. The government does offer simplified expenses for home-based businesses, which would save you having to calculate how much your heating bill went up due to you working from home. There are some grey areas in this type of expense so do your research before submitting anything to HMRC. 
  • Your marketing costs. Promoting the business is necessary for bringing in sales and customers, so you can also offset this cost on your tax bill.
  • Training courses are also tax-deductible, so if you regularly have to attend renewal courses for specific skills, you can save some tax in the future.
  • Cost of materials or goods that you sell on. You can claim your stock or raw materials cost as part of your expenses as it is necessary to trade.
  • Clothing expenses apply to businesses that have uniforms. You can claim the cost of buying and laundering uniforms but not if you wear clothes that are just part of your usual wardrobe. 

Pay into a pension

As you’re self-employed, you’ll need to set up your own pension pot. For basic rate taxpayers, every £100 you pay into a pension is topped up by £25 by the government. You have to declare these contributions on your tax return to get the top up, and all contributions up to £40,000 per year are tax-deductible. The savings you could make on this could be massive, and if you haven’t been claiming this, then you can backdate these payments on your self-assessment for the previous three years. 

Make your financial management simple with Countingup

Financial management can be stressful and time-consuming when you’re self-employed — that’s why thousands of business owners use the Countingup app to make their financial admin easier. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

Countingup can manage your expenses and categorise them for you, which in the end will give you a tax estimate. This could save you hours of bookkeeping admin and you’ll always know how much you owe HMRC with this feature.

Find out more here.