Expert opinion: Self employed? Don’t miss out on tax savings
Last week’s figures from the Office for National Statistics show that the number of Britons who are self-employed is higher than ever.
However many are not taking advantage of the full tax allowances they can get, particularly those ‘olderpreneurs’ who have become self-employed late in life.
Being self-employed can be great in terms of flexibility and freedom, but it is a double-edged sword.
Employees who go freelance miss out on employee based benefits such as life and health insurance and pensions, and many do not know how to replace them.
By maximising the tax savings from self-employment, Britain’s new army of freelancers can maximise their income and ensure that they are ready to have a happy retirement too. Freelancers shouldn’t have to work ‘til they drop.”
Here are six tips for maximising self-employment income and savings:
Don’t forget your pension
Employers’ contributions to your pension fund abruptly cease when you leave the company, so it is important not to stick your head in the sand over pension payments.
The tax relief on your pension is still valuable, so set up your own pension as soon as you can. Tax relief for higher-rate taxpayers is 40 percent on pension contributions.
Keep it in the family
If another member of your family of working age is not using his or her full tax allowance, employing them in the family business could help to save tax. Their salary would be an allowable expense to you, and would allow them to use the current tax allowance of £10,000.
Admin and book-keeping are popular ways of employing a spouse or adult child. Ensure that they are doing enough work to justify the salary you are paying though, otherwise the taxman will take a very dim view.
Claim all of your expenses
You can offset the cost of running your business against income to reduce your taxable profit. There are full details at www.hmrc.gov.uk/factsheets/expenses-allowances.pdf
Maximise your dividends
If you open a limited company you can pay yourself dividends and salary, and an accountant can help you to set the balance between these two forms of payment at the most beneficial level, so that you do not pay too much National Insurance.
Make sure you understand how this works before paying yourself from your limited company.
Don’t get caught out by VAT
If your turnover of VAT taxable goods and services supplied within the UK for the previous 12 months is more than the current registration threshold of £81,000, or you expect it to go over that figure in the next 30 days, you must register for VAT.
Not doing so will leave you with fines and a nasty bill from the taxman. Registering for VAT can be beneficial for tax purposes.
If you are VAT registered, you will have to charge VAT on your goods and services (known as output tax). However, you will also be able to reclaim VAT that you are charged by other businesses. This is known as input tax.
As long as your input tax exceeds your output tax in a given period, you will be able to reclaim the difference from HMRC.
Note that once you are registered for VAT there are penalties for late filing and payment, as well as significant amounts of paperwork; but failing to register is one of the most common causes of new business failures.
Have an exit plan
The aim of most entrepreneurs should be to have an exit plan and selling your business can provide the capital security you need to finally hang up your boots.
For those that structure their business properly, up to £10m of Entrepreneurs Relief is available. This can reduce the CGT liability from 28 percent to 10 percent on the sale.
Stephen Depla is head of office at Brewin Dolphin, Marlborough. For more information about Brewin Dolphin’s products and services, click here.