Self-Employed – Some Legal Ways to Reduce Tax

The Telegraph has an article looking at ways that you can legally reduce the amount of tax you pay if you’re self-employed.

The economic environment has made it tough for freelancers. Recent data highlights a decrease in earnings and a shift back to traditional employment for many. But there are legal avenues through which freelancers can maximise their earnings and minimize tax outgoings. Here’s a breakdown:

  1. Claim Expenses
    • What Can You Deduct?
      • Office costs, travel, clothing (with conditions), staff, stock, finance costs, bills related to work premises, advertising, and training costs.
    • Main Takeaway:
      • Ensure your expenses are directly related to your work or HMRC may contest them. If you’re working from home, there are fixed allowances for claiming a portion of your home running costs. Also, work-related travel can be deducted from your taxable income.
    • Examples:
      • Home-based workers can claim up to £26 per month, depending on hours worked. For travel, the first 10,000 business miles can be deducted at 45p per mile, then 25p per mile after.
  2. Restructure Your Business
    • Why?
      • To make your business more tax efficient.
    • Options:
      • Hire a family member, which can help you take advantage of tax allowances. Invest in your pension. Form a partnership to leverage multiple personal allowances. Or, consider transferring your business to a company structure for potential tax benefits.
    • Important Note:
      • Transferring to a company structure might be beneficial, especially if your business’s profits exceed its outgoings since corporation tax rates are lower than personal income tax rates.
  3. Invest in Your Pension
    • Benefit:
      • Pension contributions get tax relief at your income tax rate.
    • How it Works:
      • For every £100 you wish to contribute, you only pay £80. Your pension provider claims the remaining £20 directly from HMRC. If you’re on a higher tax rate, you even pay less. Plus, you can back-claim up to four years if you’ve missed any.
  4. Leverage Additional Tax Allowances
    • For Families:
      • If the highest earner in your household earns less than £60,000, consider claiming child benefit, worth up to £2,500 annually for a family with three kids.
    • Marriage Allowance:
      • If your income drops below £50,000 and your partner earns under £12,500, you can take advantage of the marriage allowance. This means the lower earner can transfer up to £1,250 of their unused personal tax allowance to the higher earner, leading to a tax reduction.

In Conclusion: The economic climate may be challenging, but by understanding and utilising these legal tax loopholes, freelancers can navigate their way to financial stability. Always ensure you’re in compliance with HMRC guidelines, and consider consulting a tax professional for tailored advice.