The time of year is upon us where many self employed workers are scrambling to get their tax returns in before the fast looming deadline of Sunday 31 January 2021. Reducing your bill as much as possible is high on everyone’s list of priorities so here we provide you with some tips on how to avoid paying too much in taxes.
Increase Your Business Expenses
This really is the most reliable way of reducing your tax bill. Whether you work from home, or rent an office space, there are several expenses that you can claim for that can work efficiently towards reducing your bill.
Allowable expenses such as office, property and equipment including stationary, computer and printer equipment, rent, rates, power and insurance costs can all be offset against your tax bill. These are all considered running costs and more in depth information about what exactly you can claim for can be found on the HMRC website.
With the state pension providing so little for pensioners to live on, it is wise for everyone to take out their own pension, and for higher rate taxpayers, the added incentive is that you can claim a 20% tax relief on any money you contribute to your pension pot up to the value of £40,000 per annum. It is also possible to back date this claim for the last three years. Check out our Guide to Personal Pensions.
Incorporate Your Business
If you are self employed or a sole trader it may be worth looking into incorporating your business. The reason for this is that it can be more tax efficient due to the fact that you can withdraw money from the business in the form of salary and dividends. Dividends do not attract any tax up to the value of £2,000, after which time they are on a much reduced tax rate of 7.5% for the basic rate, 32% for the higher rate and 38.1% for additional rate taxpayers. The other big advantage to incorporating your business is that any liability is that of the company, rather than yours personally.