Anyone who pays tax surely wants to save some of it and reduce it. Good news for all those people as there are several ways to save on tax bills legally. No matter whether you are self-employed, an employee, an investor or a landlord, there are several ways to cut down on your tax bills. In some cases, it’s you who has to play a part, and in others, you have to make some changes and be aware of some stuff. Let’s get into saving some money from the taxes you pay.
Ways to reduce the tax you pay on your income.
See what your tax code is
The tax code assigned to you has information regarding the amount of tax HMRC is supposed to collect from you on your income. You can find it on your payslip. Keeping a check on your tax code every year is vital as well as when you are changing jobs to make sure you pay the right amount of tax, not less, not more. If your tax code is not correct according to your income situation, you may be eligible to pay a lesser amount of tax in the upcoming months or for reimbursement for the years you have paid tax.
Claim your tax credits
Tax credits have several benefits. They can pay additional money to anyone who is looking after children, workers on low incomes and disabled workers. Two significant types can claim. These include child tax credits and working tax credits. However, you should note that both of these tax credits cannot be claimed if you are already claiming Universal Credit.
Pay towards a pension scheme
You can make contributions to your pension scheme originated by your employer from your total payment. You also have the opportunity to make any additional voluntary contributions if you wish. The grants are made before there any tax charge on your income. As a result, you will receive tax relief from the government on your pension. Which is a free bonus for saving for retirement?
Take advantage of the marriage allowance
Most people are unaware of the marriage allowance. If either of the partners earns less income than the government regulated personal benefit, then you can make use of this. To save money from this, the lower-earning partner can transfer any unused personal allowance to the higher earner. The limit is a transfer of up to £1,250 in the tax year 2019-2020. Consequently, you can save up to £250. However, to assign any allowance, the high earner needs to be paying at least 20% tax.
Never miss the tax return deadline
In case you’re one of the 12 million individuals who need to present a self-assessment taxation form, ensure you don’t miss the deadline. It can be extremely costly for you. For online entries, you have until 31 January 2020 to send in your 2018-19 return. Be that as it may, on the off chance that you need to record on paper, you’ll have to submit by 31 October 2019. Miss the cutoff time and there’s an automated £100 fine, regardless of whether you owe any tax or not.
Never let go of overpaid taxes
On the off chance that you are not a taxpayer, or your income surprisingly decreases during a year, you may find that you’ve paid taxes more than you were supposed to as HMRC is unaware of the change in your income. To recover the tax, you have to fill in the R40 from HMRC or call them.
Use employee tax benefits to save taxes
Claim tax-exempt child care
In the tax-exempt childcare scheme, you can claim back 25% of your childcare costs, up to £500 quarterly. However, you’ll need to meet set criteria, including having a kid under 11 and making under £100,000 annually. Or if your employer starts a salary sacrifice childcare scheme, these can bring about generous savings for the employer as well as the employee. The salary sacrifice childcare schemes are relatively easy to set up and helps both the employee and employer save taxes.
Get a season ticket loan
Few managers will offer you a tax-exempt loan to purchase your season ticket. Which will conceivably spare you hundreds of travelling costs? So ask your employer if it is a part of the overall scheme and save tax money.
Get a company vehicle.
If you are qualified for a company vehicle, take it. Otherwise, think over it and try to figure out whether it will be better to claim the cash equivalent of the car.
Reduce the tax on your savings
Increase your personal savings allowance
In 2019-20, you can receive £1,000 of interest on saving funds tax-exempt if you’re a basic rate taxable citizen. In case you’re a higher-rate tax citizen, your tax-exempt remittance is £500. You’ll have to pay tax on savings income that exceeds this threshold. The saving funds supplier will never again deduct this. On the off chance that you need to pay tax, you’ll have to pay it through self-evaluation or have it deducted utilizing PAYE. Remember that you won’t have a reserve funds allowance as an additional rate (45%) tax citizens.
Change to a low-emission vehicle
If you are changing your company vehicle, consider a low-discharge model. There is a tax at a lower level of their rundown cost than cars with a high CO2 rating.
Benefit as much as possible from your Isa remittance
Everybody can benefit from their yearly tax-exempt Isa remittance. For the 2019-20 taxation year, you can deposit up to £20,000 into your Isa accounts. Which would all be able to be placed in a money Isa or a shares and stocks Isa or split between both cash and shares and stocks.
Utilize the starter rate for saving funds
If your salary from a pension or job is underneath the £12,500 par in 2019-20, you can make use of the starter rate for savings. But if you make money through savings interest, you may likewise fit the bill for the starter saving funds remittance. Any premium you earn up to £5,000 is tax-exempt. Which will be notwithstanding your reserve funds allowance, which means you could earn as much as £18,500 before having to pay any government tax. Settle for less government tax in case you’re independently employed. Self-employed people can profit by a scope of tax advantages. Not confident in case you’re independently employed? Check HMRC’s meaning of independently employed.
Costs brought about while maintaining your business can be deducted from your profits, decreasing your overall tax. Which could incorporate things like telephone expenses, fuel, or running expenses for your home office?
Independently employed vehicle costs.
You can by and large claim the running expenses of a vehicle you use for business (however not the cost of getting one). If you utilize a similar car in your private life, you can claim the extent of the total expenses. To do this, you’ll have to include the majority of your engine costs for the year and work out the level of business miles you did, or you can claim a fixed rate mileage allowance for business travel.
Income support for self-employed
As an entrepreneur, you can decide when your bookkeeping year closes – and it is essential to pick cautiously. If you choose a year-end bookkeeping date prior in the taxation year, you’ll have more time to settle government taxes on the profits earned. Which implies as your earnings go up, your tax bill will rise all the more gradually. The additional time you have, the less will be the hassle of paying the tax on time.
If you make a misfortune in one taxation year, you can convey it forward and balance it against profits from an increasingly successful year. Which reduces your taxable income.
Payments on account
Independently employed individuals will be required to pay government taxes in two payments in advance: in January and July. The sum you’ll pay will base on the earlier year’s tax bill. In this way, if you hope to acquire less in 2018-19 than in the prior year, you can apply to lessen your payments on account. You’ll have to submit the SAS303 form either on the web or utilizing mail to HMRC.
Tax planning for new start-ups
Going into business is an energizing and testing task. During the beginning period, you should settle on a wide range of choices that could be useful in the long run for the accomplishment of your enterprise. Among the things you should consider is the kind of business; profit potential; how you will pay yourself; and the pace of business development.
You will be paying tax on all of your profits. Therefore, a vital component of tax planning is to claim every single deductible cost, a significant number of what will incorporate into your bookkeeping records.
On the off chance that you are independently working and do your business at home, it makes you eligible to claim tax relief on some of your home unit costs, including insurance, utilities and fixes. Similarly, you could likewise have the option to request for the costs of accommodation and travel when you go to work ceaselessly from your principal area of work. Therefore, you should keep satisfactory business records, for example, a journal of business ventures. Which is essential because claiming that your documents are precise, HMRC can request the data.
With the advent of tax being made digital for VAT, an appropriate accounting software bundle is vital to enable efficient bookkeeping and to allow you to fulfil your digital tax requirements.
Intentional Cash Basis
Most businesses can claim a 100% Annual Investment Allowance (AIA) on a portion of expenditure on most types of plant and machinery (except cars). The AIA applies to businesses of any size and most business structures, but there are provisions to prevent multiple claims.
You may likewise wish to take into account the voluntary cash basis for figuring taxable salary for small businesses. Which permits qualified, independently employed people and associations to compute their profits depend on the money that goes from their company. Organizations qualify if they have yearly invoices of up to £150,000, and they have the option to keep on utilizing the money premise until invoices reach £300,000.
Capital allowance is the reduction in your tax that you can claim for the sake of capital consumption, for example, business equipment, instead of devaluation.
Saving taxes for small businesses
Know your industry
Keep connected with the firms that you work with or your trade partner. Attend their events and read their bulletins. Most businesses have different allotments and allowances endorsed by HMRC. For example, uniform allowances. Learn about such benefits from them. Moreover, your trade partner or an association are your allies. Use them in times of need.
Invest more time in your business
Your business will profit the most by you investing energy and time in it. Investing in hiring a bookkeeper will not only pay you back in terms of better accounts management, but it will also allow them to use the best of their knowledge to claim what you are entitled.
Know your VAT
The VAT is a typical territory where entrepreneurs are missing out. Is it safe to say that you are paying what you should? Are you aware of the Flat Rate Scheme? Numerous organizations are uninformed of the Flat Rate VAT scheme.
More or less, under the flat rate scheme, you pay a single, flat rate of VAT on your gross turnover. HMRC have enlisted a flat VAT rate list for various industries. For instance, for Estate specialists and property retailers, it is 12%, while it is 14.5% for PC and IT experts. You pick the VAT rate that is most relevant for your industry, apply the price to your gross turnover in the quarter and pay that amount to HMRC. You can’t usually recover the VAT on the things you buy. However, you get to keep the difference between the VAT you charge to your clients (typically 20%). You also get a 1% discount from HMRC on your first year of registration.
Trust your accountant
Most business owners do not talk to their accountants as they think that they are the reason they have to pay a lot of taxes. However, in reality, people who consider their accountants as their trusted financial advisors are the ones that end up paying fewer taxes. Business owners should be able to trust their accountants as someone who can help them save money on taxes. If this is not the case with you, change your accountant.
Work from home
HMRC permits substantial expense saving funds for independently employed organizations that invest time in telecommuting. Ensure you know about them. Most organizations claim a very humble ‘use of home’ allowance of £2 every week when HMRC permits you more than that. For sole proprietors who work from home, HMRC has a significantly more logical technique for figuring what costs you can deduct for the utilization of your home.
If you are an independently employed entrepreneur, you can claim a part of the accompanying home expenses;
- Council Tax,
- Mortgage Interest,
- Heat and light,
- Landline and telephone costs
- General family unit fixes and support
Businesses can also claim a charitable ‘Use of Home’ allowance if they use a devoted room in the house for work.
Keep it in the family
The standard Personal Allowance is currently £11,850 of tax-exempt salary. If you have family members that can carry out business duties and tasks, you can use their allowances of the tax-free wage as well.
Treat your staff
Businesses can save taxes when they provide benefits to their employees, saving taxes for themselves and their employees. However, it is astonishing to see how few companies take advantage of these government-led schemes. For instance, the cycle to work scheme allows saving 25% on a new bicycle all the while saving you taxes. This scheme has been operational for quite some time now, but not many businesses are seen using it despite keen promotions of this scheme by the NHS.
Similarly, Tax-exempt childcare vouchers are an incredible way for businesses to save tax while being a tax-free advantage for the employee. Although HMRC has reduced the amount of tax you can save through the salary sacrifice scheme, it is still worthwhile.
Pay yourself proficiently
The sum you pay yourself from your business affects how much taxes you have to pay. How you pay yourself can likewise have a noteworthy effect too. You need to regularly evaluate your salary, dividends from the profits, benefits in kind.
A typical example of a benefit in kind is a company car. However, each case is different and can consider on a case by case basis. But for the most part, business owners can be exempted from tax by using a company vehicle. You must keep HMRC informed of when an employee gets a car, or you may face a hefty tax bill at the end of the year.
Keeping the HMRC informed prevents you from any unforeseen tax payments. The same goes for the dividends paid. They should be monitored monthly with a thorough record that gives monthly management information. Bonuses are a great way to pay different people involved in the business, given that it stays under the permissible company laws and ultimately the HMRC.
Build a good team
A sole trader should not shy away from building a good team that he can trust. A team that is good and trustworthy can take your business towards growth. Make sure you find yourself a team of accountants and financial advisors that you can trust and rely on for your financial matters and bookkeeping. Both have different things to do, so make sure you get the most out of the two. However, the two are not generally the equivalent. Having the correct guidance regarding potential ventures and reserve funds limits can likewise save you tax money.
The Bottom Line
All those who are paying taxes and want to save up some to increase their income should do their research. It is essential to figure out your standing in the market and industry. Cross-check yourself against HMRC’s rule and figure out what taxes you need to pay and benefits and expenses you can claim. It might take some time and effort to save up money from taxes, but it is worth it over the long run. You won’t even realize how much you have been losing if you don’t go for it. It depends on the kind of business you have to select the right measures to take for saving up taxes.
Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.