People often pay more tax than they need to, simply because they aren’t aware of tax relief, allowances or expenses that can be claimed, legitimately reducing their tax bill. If you are self employed, every penny does count, especially during an unstable economy.
Everyone in the UK above the age of 16 receives a tax-free allowance annually. These are personal allowances that vary each year. For the year 2014-15, the basis allowance is £10,000. By employing your spouse or partner, or your child if they are above the age of 16, you will be able to claim back the amount paid in wages as a deductible expense. You must comply with the regulations for National Minimum Wage and have evidential documents that can be produced for HMRC if an investigation is conducted at any time.
Higher rate tax
Once you have income above £100,000, you will lose the benefit of your personal allowances. As you lose £1 from your personal allowance for every £2 of income, you will lose all your tax free allowance once your income
reaches £118,880. The allowances which you lose will be taxed at the basic rate of 20 per cent, but the income exceeding £100,000 is taxed at the higher rate of 40 per cent, meaning you pay tax on that portion of your income at 60 per cent. You could make increased payments into your pension fund, although there is a maximum amount. You can also make Gift Aid payments to keep your income below £100,000.
Claim all costs incurred for your business against your gross profits. You can claim for any expenses while running your business, and you must keep evidence of the expenses you are claiming and any receipts. The expenses are deducted from the gross profits, which means you pay tax on a lower amount.
If you have spare income, don’t leave it in a savings account. You could place the maximum amount in an Individual Savings Account, where it will earn tax-free interest.
Complete and return all documents, including your self assessment tax return to HMRC before the relevant deadline to avoid penalty charges. Keep accurate records for your business and be careful to avoid making errors, as this could also attract a penalty. If HMRC requires documents or information from you, make sure you send it or you could be charged a penalty. Penalties can soon add up to a large tax bill, maybe with interest being added.
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