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Self-employed? Here are four tips to cut your tax bill

With the self-assessment tax return deadline fast approaching, we look at ways to cut your tax bill and make next years' tax return less painful.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Leaving your self-assessment tax return until the last minute? Don’t worry, you’re probably not alone.

In fact, last year more than 700,000 people left it to the last day to submit their tax returns, and some 26,562 stragglers left it until the final hour.

The deadline for completing your tax return online is Sunday 31 January 2021.

Tax can be boring and it might not be something you look forward to every year. But doing your tax return sooner rather than later can help avoid any last-minute panics. Rushing to complete your form could mean you miss vital information.

Here are four tips to help save on tax or maybe even claim some back.

This isn’t personal advice. Tax is a complex subject, so if you're not sure what’s best for your situation you should seek professional advice. Tax rules can change and any benefits depend on your circumstances. If you’re a Scottish tax payer different tax rates may apply.

1. Claim for higher rates of pension tax relief

Pension and tax rules aren’t the easiest to get your head around. And a major area of confusion is tax relief.

Put simply, if you’re a UK resident under 75 who makes personal contributions to a pension, you’ll get tax relief on the amount you've paid in. This is usually paid automatically into your pension by the government. For example, you pay in £8,000 to your pension and the government pays in £2,000 (20%) in tax relief.

If you’re eligible and pay tax at the higher rate of 40%, you could get up to a further 20% in tax relief if you claim it. Using the same example, you could claim back up to a further £2,000 in tax relief. That means a total pension contribution of £10,000 could effectively cost you as little as £6,000.

You can normally only access your pension from 55 (57 from 2028).

How do I claim higher-rate tax relief? This is something you can easily do through your tax return.

It’s important to include the gross value of your pension contributions. That’s the total of what you’ve paid in (your personal contributions) plus the 20% tax relief from the government.

The higher-rate tax relief will then either be paid to you directly, or HMRC will adjust your tax code or reduce your tax bill.

Pension tax relief calculator – how little could your pension contribution cost you?

If you run your own company and have a workplace pension, you’ll need to do a bit of digging. Some schemes automatically reclaim basic-rate tax relief with any additional tax relief needing to be reclaimed through a self-assessment, whereas others might do it all automatically.

Workplace schemes which use salary sacrifice will automatically grant tax relief at your highest marginal rate. If you’re unsure, get in touch with your pension provider to check the scheme rules.

Take a look at our self-employed and business owners pension hub

2. Claim all your allowable expenses and any extras

Allowable expenses

If you work for yourself, your business will have running costs. You can deduct certain expenses from your profits before tax, which is a great way to cut down your tax bill.

There’s a useful list on the HMRC website, which includes everything from advertising costs to travel costs – depending on what you use for work. Check this to make sure you’re claiming for everything you’re entitled to.

Working from home

You might be able to claim a proportion of certain costs associated with working from home. If you’re a sole trader or part of a partnership, you can either calculate what you spend on these for work purposes, or you can simply claim a flat rate (also known as simplified expenses). The HMRC website has more information on the best way to claim for your circumstances.

Gift Aid

If you pay tax above the basic rate, you could claim tax relief (up to 25%) on charitable donations made using Gift Aid. You don’t just get this on cash donations either – you also get tax relief on gifts of land, property or shares you make to charity. Remember, if you’re a Scottish tax payer different rates of income tax apply.

Ticking the ‘Gift Aid’ box when donating means the charity can reclaim 20% tax back from the taxman. But if you pay tax above the basic rate, you’ll need to reclaim the rest of the tax on your donation through your tax return.

3. Make a charity donation now to reduce your tax bill

If you have the spare cash, making a charitable donation before 31 January 2021 could reduce your tax bill for the 2019/20 tax year. This is because donations can be claimed in either the current or previous tax year.

This is particularly useful if you paid higher-rate tax last year and a lower rate this year – as you can still claim higher-rate tax relief on your donation.

4. Correct and claim against previous tax years

You can claim a refund for any overpayments you’ve made in the last four tax years. So if you stumble across something you could’ve claimed for previously, or if you spot a mistake in previous years’ tax returns – make a note.

Write to HMRC explaining that you’re making a claim for ‘overpayment relief’. You’ll need to include:

  • Proof you’ve overpaid tax through self-assessment
  • Signed declaration saying the details you’ve given are correct
  • How you’d like the repayment to be made

How to make next year’s tax return less painful

Your tax return relates to the previous tax year, so making a pension contribution today could help reduce your bill for next year. If you don’t already have a pension and would like to save for your retirement, you could think about opening one and benefit from these generous tax perks.

More on pensions for the self-employed

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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