There are many ways to reduce your tax bill if you are self-employed and be efficient with your finances.
For those who are new to the freelancing industry, it can be easy to get blind sighted by the perceived glamour of working to your own schedule. Don’t get me wrong, there are a lot of perks to being your own boss, and coming and going as you please may sound like the ideal scenario, but of course, there is so much more to it than that!
One of the biggest challenges for most freelancers (especially those new to the industry) is being in charge of your own finances! It can often come as an afterthought, and when the tax year rolls around many of us are left floundering with no real clue where to begin!
Unfortunately, most of us only learn how to manage a business the hard way, but if you have found yourself here then this may be able to save you from following in so many freelancers’ footsteps!
Being Self-Employed isn’t just about your Service. . .
Without question, the biggest eye-opener for me at the start was learning how much actually went into running a business. I have met so many freelancers who have said the same thing, you get so wrapped up in your specific niche and perfecting it, that you don’t even consider the other things needed to become a success!
When you enter the world of freelancing it can be incredibly intimidating, you start to notice those around you with years of experience, established websites, portfolios, contracts, accountants, insurances (you name it, they have it!). The first thing to mention here is that this stuff isn’t the be all and end all of becoming a success, you can make a brilliant business without all the bells and whistles that some people choose to have.
What I would suggest, especially for those new to the Industry is to not try and take on everything yourself all at once! There are some incredibly helpful tools out there to help you stay on top of your finances! Accounting software such as Freshbooks and Free Agent are brilliant options if you are looking for support without spending loads of money! If you have a slightly bigger budget then hiring an accountant can be an excellent option, you can get the support that you need which is likely to save you making any expensive mistakes – remember an accountant will know all the tips and tricks that you can use to save yourself some money!
Regardless of the route you go down be it software or an accountant; I would stress the importance of tracking your own finances along the way! It is important that you have a full understanding of your financial situation so that perhaps later down the line an accountant won’t be necessary! I personally track mileage, invoices and anything else I need to through invoicely.com, which works great for me!
Why Should You Bother Learning About Taxes?
If you have ever been in normal employment, you likely know that at that time you have very little to do with your taxes. For most jobs, a portion of your wage is removed every month before you even get to see it, out of sight out of mind.
However, when you make that switch to self-employment you quickly discover that if you want to stay on the right side of the law, there are things you will need to do! Self-employment isn’t just about being great at what you do; it means learning how to monitor your incomings, outgoings, and expenses. It also means that you will need to learn how to calculate tax deductions, and fill in a self-assessment form!
I bet by now you are beginning to see why so many Freelancers opt for an accountant to manage their finances! In truth, it really doesn’t have to be so scary and complicated, I really believe that by taking the time to do your research and organising yourself in a particular way, you can save hundreds of pounds in service fees as well as in your overall tax bill!
How to reduce your tax bill?
Any freelancer will tell you that the end of tax year is always going to be a struggle. With all the perks that come with working for yourself, you do miss out on a couple of the benefits of regular employment – which often include things such as pension schemes and automatic tax deductions with limited extra effort on your part!
To get yourself in a financially stable position, there are plenty of things you can do to help you along the way! Let’s face it – paying your taxes is never going to be appealing, but you can make it a hell of a lot less hard on yourself!
Investing In Your Future Self!
It may seem like an obvious place to start, but you would be surprised how many freelancers I know who have either taken out no pension at all or taken years to start one up! Not only will a pension secure a comfortable future for you and your family, but also it can actually help to reduce your tax bill in the process!
Let me explain, if you are self-employed you can get tax relief on money that goes into your pension. Essentially it means that the money that would be going to the government would instead be going into your pension pot! You can claim up to 20% tax relief on cash that goes into your pension, which means more financial stability for you in the future!
This is one of the biggest ways that you can reduce your tax bill, and it is also one of the most common things freelancers get wrong! Many of us who are self-employed struggle to know what is and isn’t acceptable to claim for. I would say that if you are going to do your research on anything, it should be how to do your expenses!
I know of freelancers who try and claim for everything they possibly can, which can have the potential to land them in hot water – there are strict penalties in place for those who try and blur the line between business and pleasure expenses!
On the flip-side, I know freelancers who for one reason or another simply don’t account for nearly half the things they could do, which leaves them unnecessarily out of pocket!
The HMRC states that those who are self-employed can claim expenses on the following areas:
- Office Costs
- Travel Costs
- Clothing Expenses
- Staff Costs
- Things you buy to sell on (e.g. stock or raw materials)
- Financial Costs (e.g. insurance)
- Costs of your business premises (e.g. heating, lighting etc)
- Advertising or marketing (e.g. website costs)
This leads me on to my next tip for keeping your tax bill down, which is to keep on top of your admin!
It sounds like a given, but it is so much harder than you may think to keep organisation over every aspect of your business. The fact is that being a freelancer means having the ability to perform a constant juggling act.
Between your life admin (which includes all your personal ingoing’s and outgoings) and your business admin, things can easily become confusing and this is usually when things get messy.
At the beginning, I wouldn’t worry too much, although it is obviously best to have a system right from the get-go so you aren’t sifting through months of documentation and screwed up receipts! Keep it simple, by following some straightforward guidelines.
- Have a separate bank account for your business: This will save you precious time when you are doing your self-assessment!
- Keep a filing system for your receipts, which is separate from your personal documents.
- Make your own monitoring system for all your clients, that way you can easily see who has and hasn’t paid you, in the long-run, this will save you loads of hassle when it comes to sorting out your finances!
I guess the take-home message for this point is that it doesn’t have to be perfect, or even super professional. It just has to work. Monitoring all the activity of your business will save you time, and most importantly help you avoid mistakes, which will lead to surprising savings when April rolls around!
Be Smart With Your Tax Payments
This won’t apply to everyone, but a brilliant way to reduce your tax bill is by ‘employing’ members of your family. Of course, if you don’t wish to go down this route (not everyone wants to work with family, I understand this!) then feel free to skip this part!
If you are currently earning over your basic 20% rate for income tax you could employ your partner, parent or child (if they are of a working age!) to help out with the business. By doing this, they are earning some money, which is tax-free up to £11,500, and you are getting an allowable expense!
Invest In Yourself
If you are employed by traditional means, you are safe in the knowledge that you are covered at work for many things. However, when you go at it by yourself you are vulnerable to all kinds of issues. If you fall ill, or work is slow, you don’t get paid – It is as simple as that.
Perhaps the less appealing piece of advice I have for you is to insure yourself. A sure-fire way to not pay tax is to not have an income, and during these times where you are not working, you want to know you are getting some protection. While your premiums won’t get tax relief, your payments will be tax-free which will be a welcome relief during those trickier times that all freelancers go through!
This is something I have always done, however, I understand that not everyone’s circumstances allow for it – but where you can I would highly recommend putting a percentage of your earnings into a savings account as and when you receive it. Having that money tucked away for when the tax man comes knocking not only gives you peace of mind, but it will also give you a sense of your income and if you are hitting the targets you set out to achieve.
Word of warning to those who decide to go down this route: Don’t dip your hand into this money pot! Tax money is not your money, and it can be so hard to forget that, especially in times of financial strain. My advice would be to always look for extra work if you are struggling, as “borrowing” from your tax savings will only do you harm in the long run.
The Internet is a wealth of knowledge, and you can find so many useful resources for helping you on your way to a more financially stable business. There is never a right or wrong answer to the way someone wishes to run their own business, but every little helps in this industry and I have learned the hard way that little tips and tricks like these can make all the difference!
After all, who doesn’t want to see more money in their pockets at the end of the year?