How to reduce your tax bill
Mar 28 2003
Three-quarters of all tax payers pay more tax than they need to. Even if you have someone to help you with calculations and figures, it’s important to have some understanding of the way your tax bill as a sole trader will be worked out. Knowing how the tax system works and what allowances you can set against your income can be very helpful.
Keep good records
Ensure you keep accurate records and save receipts so that all business expenses can be claimed against income. As a sole trader working from home, you can claim a proportion of household costs against your business.
“You can claim a proportion of your home office use so record the expenses, rent, rates, heat, light and claim a proportion based on the usage. For example, if you have five main rooms and use one for business claim 1/5th of the total expense,” advises Clive Sparks, director of tax practice Ledger Sparks.
If part of the home is used exclusively for business, you can claim part of your mortgage interest. But beware of allowing any part of it to be used exclusively for business. Although you might be able to claim more relief against income tax, you could become liable for business rates and, if a point comes when you sell your home, there could be capital gains tax to pay on part of the home.
Sparks outlines the following points that you could also consider to help reduce your tax bill:
- If you have to borrow any money to set up the business then this will be a qualifying loan so claim the interest in your tax return
- Premiums to a personal pension plan also qualify for relief
- Consider employing your children if they can usefully perform some tasks
- If profits are over £15,000 then consider incorporating the business, i.e. set up your own limited company
You could also think about employing your spouse or partner if they have no other employment – you could pay them a salary of up to £4,615 before the employer/employee has to pay national insurance contributions.
IT savings
Up until the 31 March this year, small businesses can claim 100% capital allowances for spending on computer equipment and peripherals such as printers, scanners, software and internet-ready mobile phones.
However, at the beginning of April, allowances are likely to be reduced to 40% for the year of purchase, then 25% of the balance for the following year and so on, although this will be subject to the outcome of the Chancellor’s Budget, on 9 April.
Other savings
If you use a car, Frances Down, tax partner at accountants Brooks & Co outlines your choices.
“You need to keep a record to establish what percentage of your car use is for business purposes. For example, you could keep records of mileage showing that 75% of the use of the car is for business. Put all this cost through as business and disallow the 25% for private use. If you have a reasonably cheap car, you may be better off with tax-free authorised car mileage allowances,” she advises.
For the year ending April 2003, the rates are 40p per mile for the first 10,000 business miles and 25p per mile for each additional business mile. But remember that the tax-free authorised mileage rates will not cover all your costs if you drive a car that guzzles fuel – you can save most tax by using a relatively small, fuel-efficient car.
Get an experienced adviser on board
Above all, choose an experienced tax adviser who can explain things in plain English, uses tax software to prepare your returns and calculates your tax for you, returns your calls and gives you sound advice. A tax adviser can also bring credibility to your business.
“If you are very much a cash-based business, be aware that you need to have an adequate way of formalising the cash you receive. If you receive cash, bank it and then draw on it,” recommends Down.