As a small business owner in the UK, how do you reduce your tax liability to increase your take-home pay?
Is a question we are asked multiple times a year.
And it’s true that reducing your tax liability as a small business owner in the UK can positively impact your take-home pay.
Particularly if you’re a ‘solo-preneur’, or a freelancer, consultant, coach or contractor!
So let’s have a look at the latest strategies and updates for the 2024-25 tax year to help you keep more of your hard-earned money. 💷
Are you keeping track of your expenses?
One of the most effective ways to reduce your tax liability is by meticulously recording your business expenses.
Any costs that are “wholly and exclusively” for your business can be deducted from your income, thus lowering your taxable profit.
These expenses can include:
- Office supplies
- Travel expenses including for mileage
- Marketing costs
- Professional subscriptions
- Health Insurance and life cover if applicable and set up correctly
- Pre-trading expenditure on business essentials such as your laptop
Ensure you keep receipts and maintain detailed records, as HMRC requires proof for any claims you make.
Have you considered using a home office?
If you work from home, you may be able to claim a portion of your household expenses as business expenses. This includes a percentage of your:
- Rent or mortgage interest in certain circumstances
- Utility bills
- Internet and phone usage relating to your business
For simplicity, you can use HMRC’s simplified expenses flat rate, which is £10, £18, or £26 per month, depending on your business hours at home.
Alternatively, you can calculate the exact costs based on the proportion of your home used for business.
Do you know about the tax benefits of being VAT registered?
If your turnover exceeds £90,000, you must register for VAT.
However, voluntarily registering can sometimes be beneficial even if your turnover is lower.
Why would you consider registering voluntarily?
Well, you can reclaim VAT on most of your business purchases, potentially reducing your overall costs.
Additionally, consider the Flat Rate Scheme if your business has a low level of VAT-able expenses; it simplifies accounting and can result in further savings.
Have you thought about setting up a pension?
I know, pensions are oh so dull… 🥱
You’d rather invest in property as your pension, then you have complete control?
Well that’s as maybe, but most advisors would recommend a diverse investment strategy, and as we’re not financial advisors, we are purely talking from a tax perspective, and currently if you operate as a limited company, making employer contributions to your pension can be an incredibly tax-efficient strategy.
Contributions made by your company are deductible business expenses, reducing your corporation tax liability.
The annual allowance is up to £60,000 for the 2024-25 tax year and unused annual allowances can be carried forward for three years.
This means that not only are you saving for your future, but you are also lowering your taxable profits. 💼
Are you utilising the Marriage Allowance?
If you’re married or in a civil partnership, and one of you earns less than the personal allowance (£12,570 for the 2024/25 tax year), while the other is a basic rate tax payer, you can transfer up to £1,260 of your personal allowance to your partner.
This can reduce your tax liability by up to £252.
Remember, you can backdate claims for up to four previous tax years, potentially increasing your savings.
Have you considered incorporating your business?
For those of you operating as a sole trader, once your profits reach a certain level, it might be more tax-efficient to operate as a limited company.
Companies pay corporation tax at between 19-26.5% dependent on taxable profit and associated companies from April 2023, which can still be lower than the income tax rates for individuals.
Additionally, you can pay yourself through dividends, which are taxed at a lower rate than income.
As the owner of a limited company, you can also take advantage of some other tax efficiencies such as making pension contributions and enjoying some trivial benefits, both of which are classed as tax deductible business expenses.
However, you must also consider the additional administrative responsibilities and costs associated with running a limited company.
Are you making the most of the Trading Allowance?
The trading allowance lets you earn up to £1,000 from self-employment without paying tax.
If your income is below this threshold, you don’t need to register with HMRC. If it’s above, you can deduct the allowance from your taxable profit , simplifying your tax affairs.
Are you seeking professional advice?
Navigating the tax landscape can be complex, and what’s right for one person may not be for another. Seeking advice from a professional can help you identify the best strategies for your specific circumstances. We can ensure you’re making the most of available allowances and reliefs.
For more detailed guidance, HMRC’s website offers a wealth of information, including their Guide to Expenses if you’re self employed:
https://www.gov.uk/expenses-if-youre-self-employed
Also, check out our ultimate guide for freelancers for more tips and strategies tailored to freelancers.
Remember, staying informed and organised is key to managing your tax liability effectively.
Have you found any other useful tips or strategies for reducing your tax bill?
