Freelancer Tax Tips
Apportion dividend income with spouse / partner if close to higher rates
If your “income” is £70,000 and your partner earns £15,000 per annum, then by allocating shares and a dividend to them, you can both stay below the higher rate tax bracket. The higher rates limit is £46,350 for 2018-2019.
Take dividends in the appropriate tax year to minimise tax liabilities
If you have a taxable source which is higher in one year (i.e. property rental, which then increases), then your salary and /or dividends can be structured to take a higher proportion in the following year. This can be used to fully utilise personal allowances and/or minimise higher rate tax liabilities simply by being savvy about when you take dividends.
Reduce payments on account
As sole trader, you pay tax liability in January plus a ‘payment on account’ which is 50% again of the liability – so if your tax bill was £3,000, you would pay £4,500 and you would also pay a further £1,500 payment on account in July.
As a limited company, you only pay tax on the company profits – no payments on account as you pay corporation tax to the revenue nine months and one day in arrears, rather than six months up front as with a sole trader.
Tax Break Period – 21 Months
If you set up a limited company, there is effectively a twenty-one month ‘tax break’ period as you would no longer make payments on account, and your first corporation tax bill for the company would be payable twenty-one months after it becomes incorporated.
However, it is always a good idea to budget, plan and save this money in a company savings account and earn interest on it whilst you wait to pay.
Make company pension contributions for yourself / partner
A company pension is 100% tax allowable and has no personal benefit. Personal contributions for the self-employed or employees are paid after tax. Company contributions give no tax liability to the director and are allowable as a legitimate deduction for corporation tax purposes.
Claim mileage allowance at 45p per mile from your company
The first 10,000 miles can be reclaimed at 45p per mile and 25p thereafter. The amount for a motor-cycles is 24p and 20p for push bikes.
These amounts are allowed by HMRC with no benefit arising to employee / director, so a 300-mile trip can be paid for with a £135 expense claim. For most modern cars this is around £40 in fuel, and your insurance, road tax etc is already paid for!
Mobile phone contract 100% allowable through a Limited Company
Your mobile phone contract is 100% deductible if you take out the contract in the company name. This would need to be separate from your personal mobile phone bill.
Allowable expenses – Are they ‘Wholly & Solely’?
All business expenses must be ‘wholly and solely’ for business in order to qualify as 100% deductible. Uniforms must technically have a logo on to qualify and anything with an element of ‘personal use’ needs to be apportioned or disallowed where appropriate.
Use of own home as office can be claimed at £4 per week or £18 per month, which reduces the income tax / corporation tax bill by £31.20 for the year.
Eliminate risk with limited liability
If you are limited, you are deemed to be a ‘separate legal entity’ and are limited to any debts incurred by your company. If you are a sole trader or in a partnership, you are personally liable for any debt. Sometimes businesses don’t work out. For this reason, It is a good idea to ring fence your personal liability with a limited company.
Year one of trading as a sole trader
However, if you are just starting a business, it might be better to set up as a sole trader in year one if you think you may make a loss, as you can offset the loss against tax you paid as an employee. As a limited company you cannot do this.
Save tax by incorporating
By incorporating and setting a director’s salary at the personal allowance of £11,850 (the NIC limit is £8,424 in 2018-19) and taking the balance of income from the company as a dividend, it is possible to minimise NIC.
As a director/shareholder you will pay between 19% to 27.5% in tax, (corporation tax and dividend tax), not the self-employed tax rate between 20% and 29% (20% income tax and 9% Class 4 National Insurance on earnings over £8,424), plus £2.95 per week in Class 2 contributions (if you earn over £6,205).
Employees pay an even higher rate of tax at 32%. (beings 20% tax, plus 12% National Insurance on earnings over £8,424).
Save £2.95 per week by utilising dividends which are Class 2 NIC free. As a director, you’ll also receive a £2,000 via the dividend tax allowance, meaning the first £2,000 in dividends is dividend tax free.