TRADESMEN – You’re taxed on profits through Income Tax and National Insurance Contributions (NICs). However, there are strategies to legally reduce your tax burden and extract (your) money in tax-efficient ways. Here are some key approaches:
1. Claim All Allowable Expenses
Ensure you’re claiming all legitimate business expenses, as they reduce taxable profits. These include:
- Office expenses: Rent, utilities, and equipment.
- Travel costs: Mileage for business trips, parking, and accommodation.
- Professional fees: Accountants, lawyers, or consultants.
- Marketing and advertising: Website costs, promotions, and business cards.
- Training: Courses to improve your skills directly related to your business.
Keep detailed records and receipts to justify these expenses.
2. Use the Personal Allowance
For the tax year 2024/25, the personal allowance is £12,570. Profits up to this amount are tax-free. If your profits are lower, you won’t pay Income Tax but may still owe NICs.
3. Pension Contributions
Contributing to a personal pension scheme is tax-efficient:
- You get tax relief on contributions at your marginal rate (e.g., 20% or 40%).
- Contributions reduce your taxable income, which can lower your tax liability.
- Pension savings grow tax-free until withdrawal.
4. Take Advantage of Tax-Free Allowances
Some income is tax-free, such as:
- Savings allowance: Up to £1,000 of interest for basic rate taxpayers (£500 for higher-rate taxpayers).
- Dividend allowance: £1,000 for the tax year (if you have investments).
- Rent-a-Room Scheme: Earn up to £7,500 per year tax-free by letting out a room in your home.
5. Consider Incorporation
If your profits are consistently high, you might benefit from incorporating as a limited company, where you can:
- Pay yourself a lower salary to reduce NICs.
- Withdraw additional income as dividends, which are taxed at lower rates than income.
6. Use Capital Allowances
For large purchases like machinery or vehicles used in the business:
- Claim Annual Investment Allowance (AIA) to deduct the full cost in the year of purchase.
- Claim for depreciation of other assets through capital allowances.
7. Employ Family Members
If a spouse or family member assists with your business:
- Pay them a reasonable salary for their work. This salary is deductible as a business expense and may be taxed at their lower tax rate.
8. Timing of Income and Expenses
• Delay invoicing to defer income to the next tax year if you’re approaching a higher tax band.
• Accelerate expenses into the current tax year to reduce taxable profits.
9. Use Flat-Rate Schemes
For businesses with modest expenses, HMRC’s flat-rate VAT scheme might be simpler and could save money if the flat rate is less than the VAT you’d reclaim.
10. National Insurance Efficiency
- Pay attention to the Class 2 NIC small profits threshold (£6,725 for 2024/25). If your profits are below this, you may not need to pay Class 2 NICs unless you choose to voluntarily contribute to protect your state pension.
- Minimise Class 4 NICs by reducing taxable profits through allowable deductions.
11. Use an ISA for Savings
Investing surplus income in an Individual Savings Account (ISA) allows it to grow tax-free. The annual ISA allowance is £20,000.
12. Charitable Donations
Making donations under Gift Aid reduces your taxable income. Higher-rate taxpayers can also reclaim the difference between their tax rate and the basic rate on the donation.
13. Regularly Review Tax Codes
Ensure HMRC has the correct tax code for your personal situation to avoid overpaying tax.
14. Consult a Tax Advisor
BlakeBarrett Consultancy Ltd can help you maximise tax efficiency based on your specific circumstances and keep you compliant with changing (UK) tax rules. These strategies should be used responsibly and in compliance with UK tax laws. Regular review of your financial situation and plan ahead too, to make the most of available allowances and reliefs.