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There are many advantages to being self-employed but it also means that you are responsible for your own accounting and taxes. Some freelancers use an accountant, whereas others choose to take care of it themselves if they have uncomplicated accounts.
When it comes time to work out your tax bill, you want to make sure that you are doing everything correctly in order to ensure you’re not overpaying tax.
Here are some of the basic things that you can do to minimise your tax bill.
Declare all of your income
Remember, the idea is to reduce potential tax bills by being accurate with your accounting and claiming any tax breaks you’re entitled to, not tax evasion.
Declare all income that you receive during the tax year. This also includes any money made from property sales, shares or cryptocurrency. HMRC has declared that people profiting from the sale of cryptocurrency will need to pay tax on any profits if this means they exceed your annual tax-free allowance. Crypto is becoming more and more popular and buying Bitcoin in 2021 is very easy and can be done via a range of platforms. It’s worth noting that money you have in crypto isn’t liable to tax, it is when you sell it the tax is liable on the difference between what you originally paid for it versus how much you sold it for.
Check your tax code
In the UK, you can earn up to £12,500 as a personal allowance before you need to start paying income tax. So your tax code is 1250L for most people.
If your tax code is lower, then income tax will kick in at a lower rate. This tax code could be because HMRC has you recorded as receiving benefits in kind, perhaps from previous paid employment.
If your tax code is not 1250L then ask HMRC to look at this to ensure that it’s correct. If your tax code is showing higher than this, it might be tempting to take advantage of the greater tax-free allowance, but if you’re not entitled to it, then let HMRC know so that you don’t get a surprise tax bill.
Photo by Daniel Thomas on Unsplash
Record your expenses carefully
When it comes to doing your annual filing, you need an accurate account of how much you have earned and how much you have paid out in valid business expenses. Make sure that you are recording every expense you make in relation to your business so that at the end of the year you aren’t paying taxes on the wrong level of income.
Claim charitable donation tax relief
Any donation you make to charity or amateur sports clouds can get you tax relief on your income tax. Register for Gift Aid means that the charities can receive even more money from the government top-up.
When recording your charitable contributions, don’t include the Gift Aid amount.
Transfer your partner’s tax-free allowance to yourself
If you are married or in a civil partnership, you can transfer a portion of your partner’s tax-free allowance to yourself if they do not work. The amount you can transfer is usually around £1000 but check with HRMC for the current guidelines.
Takeaways
No one wants to pay more tax than they have to and saving money is a priority for many. Recording your financial activities accurately and ensuring that you’re taking advantage of any tax relief you’re eligible for, is the key to reducing your bill by potentially hundreds of pounds every year.