There are a range of taxes which affect businesses. You could be required to pay income tax as a sole trader, for instance. However, when you become self-employed, you can claim some operating costs against your tax bill, lowering outgoings. Turner Little considers the tax allowances you could potentially utilise.
Home allowance
If you operate your firm from your home, you can charge a reasonable fee per week to cover operating costs. This encompasses things like water, lighting and heating. With a home-based business, it is wise to take out various insurance policies, like contents insurance. This helps you repair or replace lost, stolen or equipment used for business purposes e.g. machines utilised for commercial cooking.
Equipment allowance
On the subject of equipment for home businesses, you can benefit from tax allowances here too. Business advice platform Start-ups writes that you can offset all home office equipment costs from your tax bill. This includes things like postage, stationary and office storage unit construction costs.
Basic allowance
There are also a range of basic allowances that any business owner can use to reduce their tax bill. This includes the basic income tax allowance, which is currently £11,000 per year, which you do not have to pay income tax on. Ask for a list of these allowances from your accountant or the UK tax office.
Travel allowance
If you are required to travel e.g. by car, to conduct work or meet clients, in the UK, you can offset these costs against your tax. You can also deduct most of the costs involved in travelling overseas for work purposes. We would strongly advise you against extending business trips for pleasure. HM Revenue and Customs (HMRC) will not let you to include these leisure expenses in your travel allowance.
Pension allowance
You may wish to place any spare profit you make as a self-employed business owner into a pension scheme. This is because you are legally allowed to offset pension costs from your tax bill, so it can prove a very efficient saving mechanism. The benefits that are available with this cost-saving strategy can differ but typically, it amounts to 17.5% of your net, rather than gross, income as a minimum.
Entertainment allowance
It is acceptable to deduct some of the entertainment costs you incur while operating as a sole trader from the tax you owe to HMRC. As an example, if you are staying more than 50 miles away from home for business reasons, the agency will allow you to use this allowance for things like the cost of evening meals. But HMRC will not let you deduct every meal you eat out from your tax, so be reasonable.
Maternity benefits
If you are looking to become a mother, you may decide to set up an office at home, for convenience. In this case, you are entitled to receive state maternity allowance for as much as 18 weeks, as a self-employed person, as long as you do not invoice out within this time frame. We should note that you can take this 18-week period before or after your baby is born, or split it between these two times.
Golden rules
You can use various allowances to reduce your tax bill when self-employed. It is vital that you apply for allowances within the required time frame, keep your records organised and invest in strong financial infrastructure, to control cash flow. As registered bank intermediaries, Turner Little can advise you on UK banking issues, so you can keep costs under control and benefit from tax allowances
Turner Little
Turner Little was founded in 1998 and it has since become a well-established UK based professional Company Registration Agent, Registered Bank Intermediaries and Business Consultants, as well as Trust provider. You can receive our monthly newsletter by signing up using the form below.
