What can freelancers do to reduce their tax bills this year?
A new year has arrived. And whilst you might not have had tax reduction as a New Year resolution, as a freelancer you should always be looking at ideas that may help improve your cash balance.
Remember that even if you save £1500 tax in 2020/21, that’s money that you don’t have to work hard for. And if your day rate is £500 that could be three days you decide to take as a break.
Saving money wherever you can is a priority for freelancers so here are ten things freelancers can do to reduce their tax bills this year, as told by Jonathan Amponsah from The Tax Guys.
1. Review your IR35 Status
Make sure you’re operating as an independent business and not a disguised employee of the end-use. None of the tax planning ideas in this article will work if you are an employee. And remember that despite all the negative headlines about IR35, HMRC do find it difficult to win some of the cases that have gone to court and it’s not as easy as they may have led you to believe.
2. Have a tax plan and review how you’re paying yourself
Unless you plan to save tax this year, it’s unlikely to happen and you’re likely to pay more tax than necessary. Avoid retrospective tax planning and aggressive tax schemes - go through this article to see if there are areas you or your accountant have neglected. Despite what you may have heard, there are still plenty of legitimate ways to save tax and sleep well at night. There is a tax planning life beyond the conventional dividends and salaries route.
3. Beware of the off-payroll tax rules
If you’re working with say a big bank and therefore affected by the off-payroll legislation, be prepared to defend your IR35 status if you’re happy that you fall outside of it. It is not the case that all workers are affected by the rules and the end-user (your client) is under a statutory obligation to properly assess you and give you time to appeal their assessment if you disagree.
4. Intelligently claim expenses including holidays and school fees
If you have a limited company, did you know that you can claim things like school fees, golf lessons and holidays though your company and save money? Yes, you can and HMRC allows you to do this through the benefit in kind system.
5. Claim £4,800 tax savings
No one likes to talk about death. But it’s a reality. And very often people pay unnecessary inheritance tax by not claiming the right reliefs.
Gifts of up to £3,000 per year can be made free of Inheritance Tax. Unlike most of the tax allowances, the limit increases to £6,000 if the previous year’s annual exemption was not used. So you get to use last year’s allowance of £3,000. A married couple can, therefore, make Inheritance Tax exempt gifts including cash totalling £12,000 per tax year.
This simple planning can save a possible tax bill of £4,800 in the event of your demise.
6. Get your business structure right
Structuring your business for tax optimisation goes well beyond choosing between a limited company or a sole trader. You need to get this basic area right; have you thought of an LLP (limited liability partnership) or a group structure? There are many tax benefits with these two structures and they are not just for professional firms or big corporates. Speak to a tax adviser or your accountant about these.
7. Use £78,000 tax allowances first
At the heart of every sensible tax planning is the use and leverage of the tax-free allowances HMRC give us. Make the most of these allowances first as they get wasted if not used. And don’t forget about the allowances of your spouse and children. Did you know that if you add up the income tax allowance, capital gains tax allowance, savings allowance and dividends allowance, you get a whopping £26,000 plus allowances in the year? That’s just for starters. And if you have a spouse or a child who are not using their allowances, then that’s a potential tax-free income of £78,000 (26,000 x 3).
8. Engage specialist tax advisers
Most business owners naturally turn to their accountants for all things tax. Accountancy and tax are two different professions, although there are many similarities.
However savvy entrepreneurs normally have both an accountant and a tax adviser. Because they know that accountant is like your GP, who is good and knows all the general rules, but tax advisers are like your surgeons, who are specialists in their field and know the exceptions to the rules. So whilst an accountant will rightly tell you that entertainment is not tax-deductible, a tax adviser will usually lift the rocks and find you some exceptions to the general rule that allows you to claim the entertainment.
9. Embrace tax-efficient pensions
Do think long term and make use of tax-efficient retirement planning. So instead of merely contributing to a pension scheme (which you get tax relief for, by the way) and leaving the funds in there, why not consider vehicles like SSAS or SIPPS to help you leverage the funds and get a second bite of the tax cherry. These pension schemes, subject to certain rules, are then used to buy, say, a commercial property and the rental income gets additional tax benefits.
10. Keep it in the Family
If your spouse’s income is low and he/she is capable of adding value to your Freelance business, why not bring them on board as both a director and shareholder? The benefit is that they can use their own allowances and share the burden with you.
Word of caution. If you’re going to do this, do it properly because HMRC is too aware of this planning. Make sure there’s a commercial reason for doing this and get the paperwork right. It’s all about commercial planning, implementation and evidence. Avoid simply bringing your spouse as a shareholder and paying him/her dividends.
These are a sample of things you can do this year as a freelancer to reduce your tax bills. Please note that as with all tax matters you should speak to a tax adviser before changing the way you are managing your taxes. The fees you’ll pay them are very often mitigated by the amount of tax they will be able to save you.