How Can Sole Traders Pay Less Tax?
Most of the businesses we work with all highlight one key value-add that we help them with: paying less tax. Knowing what steps you can take to reduce your tax bill has a huge impact on the longevity of your business. This blog focuses on some of the key tax-saving strategies for small sole traders who work by themselves, have no employees and aren’t VAT registered.
If this sounds like you, then read on!
Talk to your accountant
Before you zone out, don’t worry. We are not trying to advertise our services here. Talking to your accountant is a vital part of paying less tax, as you need to make sure your goals are aligned.
There are plenty of accountants out there that focus exclusively on compliance and the bare bones of accounting. Others, however, can provide a more comprehensive service for saving tax and strategic tax planning.
The point is that if you don’t ask, you won’t know. These are very important conversations to have with the person that oversees the financial health of your business. Make sure you let your accountant know that you are looking to save tax. A little bit of investigating can go a long way, as each business can make tax savings. You (or your accountant) just need to know where to look.
Tax Avoidance Disclaimer
Let’s get one thing out of the way. Don’t get tax evasion mixed up with tax planning. The two are very different things. Tax evasion is illegal, while tax planning is legal. You always need to make sure you are fully aware of the law so that you don’t get caught out. But an accountant can often advise you of some simple tax-saving tips.
For example, a very common way of making some tax savings is by paying your spouse for work they undertake in your business. This can reduce your tax bill because you are using up their personal allowance. Legal, straightforward and easy to set up. You can also pay your kids for work done, although there are some caveats attached to this. More on this in the full guide.
However, there are plenty of grey areas, which means you need to know exactly what laws apply to your situation. Entering into a dispute with HMRC can lead to the tax bill and it can also cost a lot in accounting fees.
Keep a record of your business costs
Anything you pay for, no matter how insignificant or small, should be recorded. Remember that you can do this even if you don’t have a receipt. As long as you can satisfy a tax inspector, you can claim back an expense that you paid for in cash. If you don’t have parking receipts, for example, there’s nothing to stop you from noting down the expense and claiming it back at the end of the year. If HMRC is happy, it is perfectly acceptable for you to do so.
What about if I work from home?
You can claim additional business expenses if you work from home. However, it is worth mentioning that these will obviously be a proportion of costs since your house is for private and business use.
For example, if you have a dedicated office at home, you can claim a proportion of the running costs of the home (calculated on a pro-rata basis). This can include rent, insurance, heating, repairs, council tax, mortgage interests, and more. If you specifically built an office for the business and you financed it with a loan, then you can claim back all the interest on the loan. However, this construction does mean there will (theoretically) be Capital Gains Tax to pay if you ever sell the house. In practice, however, there is usually not too much to worry out. We explain this in more detail in our full downloadable guide.
There are plenty of more tax benefits to working from home. By making your home your main place of work, you can also claim for motor expenses from home to your clients. This means that every time you leave the house, you’re away on business, which means you can claim back these expenses.
The VAT Threshold
Be very wary of approaching the VAT threshold, as this can cost you around £15,000 the minute you go VAT registered. A popular way of negotiating this roadblock may be split business with your spouse. Make sure you get professional advice, however, as artificial arrangements won’t work and will only arouse suspicion from HMRC.
Additionally, it may be worth registering for VAT if you deal with or supply a lot of VAT-registered businesses, as you will be able to reclaim VAT on what you buy.
Think about when you’re purchasing assets
Purchasing assets should always be a carefully considered decision, but especially if you are looking to purchase items at the end or beginning of the financial year. This is because you can get up to 100% tax relief in the accounting year that you purchase an item, even if it is on the very last day of the accounting period. Essentially, this means that you could buy one day earlier and get a full 100% relief one year earlier, which will benefit your cash flow. The only thing you need to remember is that the asset needs to be in use in that particular accounting year.
Get the full guide
If you want more information or require more detail on tax savings for sole traders, please get in touch with us and we will send you the full guide directly.
