If you’re a sole trader, managing your tax liability is a crucial part of maintaining the financial health of your business. After all, effective tax planning can help you reduce the amount you owe to HMRC, ensuring you retain more of your hard-earned income.
In this blog post, we’ll go over some of the best strategies for sole traders to minimise their tax bill.
Understand your allowable expenses
One of the most effective and simplest ways to reduce your tax bill is to claim all of your allowable expenses, which are costs that you incur exclusively for the day-to-day running of your business operations.
The idea is that you had to incur these expenses to run your business and should therefore receive tax relief on the costs. In practice, this means you can deduct the cost of your allowable expenses from your pre-tax profit, ultimately leaving you with a smaller tax bill.
The most common allowable expenses include:
- Office costs: This can include rent, utilities, and supplies.
- Travel expenses: Costs related to business travel, such as fuel, train fares, and accommodation.
- Equipment and tools: Any equipment or tools necessary for your business.
- Marketing and advertising: Costs incurred to promote your business.
- Professional fees: Legal and accountancy fees.
Again, most expenses must be made exclusively for business purposes. So, a pair of jeans you wear to work sometimes are not allowable; the same is true with suits. However, you should be able to deduct the cost of branded uniforms from your tax bill.
You may be able to claim for portions of your costs where those costs relate to an item you use for both business and personal purposes, such as a mobile phone.
It’s essential to keep accurate records related to your allowable expenses to prove to HMRC that they qualify for tax relief.
Use capital allowances
While allowable expenses concern smaller day-to-day business costs, capital expenditure refers to longer-life and larger assets (such as machinery, equipment and vehicles) that improve your business. Fortunately, you can apply tax relief to these costs to reduce your tax bill through different capital allowances, including:
- Annual Investment Allowance (AIA): This allows you to deduct the full value of qualifying items, like machinery and equipment, from your profits before tax, up to a specified limit each year (currently £1 million). The AIA limit can change, so it’s essential to stay updated on current thresholds.
- Writing Down Allowances (WDAs): If you have used up your AIA, you can claim WDAs on any remaining balance. These allow you to deduct a percentage of the value of an asset over several years.
- First Year Allowances (FYAs): For certain environmentally beneficial equipment, you can claim 100% of the cost in the year you purchase the asset.
Make pension contributions
If you’re trying to save some money for your future and retirement, make sure that you’re contributing as much as you can afford to your pension as you may qualify for generous tax relief.
The tax relief available to you is the highest percentage of income tax you pay. So, if you’re a basic rate taxpayer and make a contribution of £800, the government will give you an extra £200, leaving you with £1,000 (because 20% of £1,000 is £200).
Consult a tax professional
Navigating the complexities of tax law can be challenging. Consulting with a tax professional or accountant like Hamilton Morris Waugh can provide personalised advice tailored to your specific circumstances. They can help you identify additional tax-saving opportunities while ensuring that you comply with all tax regulations.
Get in touch for assistance with your business tax planning.
