Taxes are a necessary evil for the self-employed. Unlike salaried employees, they have to pay their taxes and can't rely on their employer to do it for them.
When you work for yourself, your tax bill may be the largest one you have to pay. But, there are ways to reduce your tax bill if you’re self-employed while staying on the right side of the tax man, for example, claiming expenses when self-employed.
In this article, we will discuss how you can minimize your tax bill as a self-employed person. So without further ado, let’s get started.
Ways To Minimize Taxes As A Self-Employed
To minimize your tax bill, you should consider taking advantage of some tax deductions and credits that may be available, including;
- Bring Forward Capital Purchases
- Claim Your Cash Expenses
- Claim Business Mileage
- Claim Pre-Trading Expenses
- Pension Contributions
- Defer Income
- Pay for health insurance
- Claim for Your Home Office Expenses
Bring Forward Capital Purchases
The Annual Investment Relief, or "AIA," is available to self-employed business owners on purchases of tools and equipment up to £200,000.
The AIA means that instead of using standard capital allowances, which spread the tax savings over several years, the entire capital acquisition is tax deductible in the year it is made.
Claim Your Cash Expenses
It's simple to overlook and write off business expenses you paid cash for throughout the year as trivial and unimportant.
Make careful to check through your stack of receipts if you have any before filing an expense claim.
For business purposes, mainly subsistence, cash expenses are frequently deductible from taxes. You can lower your tax liability and obtain some tax-free money by making sure you have reported all of your cash expenses.
Claim Business Mileage
If you use your car for work-related objectives, you can claim up to 45p per mile for the first 10,000 miles and 25p afterward. This sum is repayable to you and can be deducted from your taxes as an expense.
Claim Pre-Trading Expenses
If this is your first year working for yourself, you might be allowed to claim expenses for items you bought before you were formally in business. Even accountants frequently overlook this year-end tax preparation strategy. If you intend to use one to address pre-trading costs with your accountant, note them.
Pension Contributions
You have several tax-advantaged retirement savings alternatives as a small business owner to consider if you want to maximize your retirement savings and receive tax advantages. If you are a sole proprietor without workers, you might want to establish a solo 401(k) or single-participant 401(k).
Following the yearly cap, you can contribute up to 100% of your income as an employee. Depending on your net income from self-employment, you can be qualified for an employer contribution in addition to the employee contribution.
Defer Income
By deferring income, you can push earnings from one tax year to the next. This implies that your tax burden is postponed to future years. When year-end tax planning, there are specific regulations that you must follow about deferring income.
You cannot claim deferred income if your product or service has already been supplied. For instance, if a client pays you upfront but hasn't finished the project, you might claim deferred revenue.
If you qualify for deferred income, you may be able to pay less in taxes. You will, however, pay for it the following year, so be cautious.
Pay for Health Insurance
It is undeniable that purchasing health insurance can be expensive. Fortunately, the IRS offers specific benefits to independent contractors who purchase their insurance. Your tax burden can be reduced if you work for yourself and cover your own health insurance.
Self-employed people are also eligible for the deduction for health, dental, vision, and long-term care insurance premiums. The deduction is also available for your spouse and any qualified dependents under 26 at the end of the tax year.
Claim for Your Home Office Expenses
If you're self-employed, you can also easily lower your tax burden by deducting the cost of your home office from your income.
HMRC allows a claim if you opt to work from home because you would be able to deduct it from your taxes if you hired an office space.
You have two options with HMRC for claiming your home office:
- With no need for receipts for a fixed charge determined by them.
- Using your actual expenses for things like gas and electricity.
Final Verdict
Hopefully, we have given you enough insights on how you can lower your taxes as a self-employed person. But don’t take it lightly because it is tricky, and you have to be cautious in every step you take; otherwise you can get a penalty.
On top of that, if you need any assistance related to your taxes, you can consult with NTRC, as they have years of experience and have helped all kinds of businesses, such as Trucker taxes services Stone Mountain has to offer you.
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