This post was originally published on this site.
Tax is an inevitable part of running a business – even as a sole trader.
However, there are ways that you can reduce your tax burden. Read on for the full guide or jump to your preferred section.
- Business Rates Relief
- Reclaim VAT
- Pay more into your pension
- Claim capital allowances
- Bring losses forward
- Claim on eligible expenses
- Apprenticeship Levy Allowance
- Employment Allowance
- Tax relief when you donate to a charity
Business Rates Relief
Small Business Rates Relief is for businesses based in England that have a property with a rateable value of under £15,000. You won’t pay business rates on properties with a rateable value under £12,000.
The amount you get in relief depends on your property’s rateable value (in the£12,001-£15,000 range. The rate of relief will go down gradually from 100 per cent to 0 per cent. That means if your rateable value is £13,500, your rate will be reduced by 50 per cent; if it’s £14,000, it will be reduced by 33 per cent.
If you get a second property, you’ll carry on getting existing relief on your main property for 12 months. You can get relief on both if neither of the properties have a rateable value of above £2,899 or the total rateable value of your properties is under £20,000 (£28,000 in London).
Check with your local council to see if you’re eligible for Small Business Rates Relief and how to get it, plus you can find out if you’re eligible for any other business rate reliefs.
For example, you could bag retail, hospitality and leisure rate relief. You’ll be eligible if your property is chiefly used as a shop, restaurant, café, bar or pub, cinema or music venue, or another hospitality or leisure venue, such as a gym, hotel or a salon. A new permanently lower business rate will be brought in once the current 40 per cent reduction expires in April 2026, but it’s not set to be as generous.
Reclaim VAT
You only need to register for VAT if you’re above the current threshold of £90,000. If you are, you can reclaim in your VAT return. If you have items for personal use as well as business use, rules will apply there. For instance, if you split your phone use 50/50 between business and personal, you’ll only be able to reclaim 50 per cent VAT on the purchase and call plan.
See more: Sole traders and VAT – Whether you pass the VAT threshold or register for VAT voluntarily, we explain everything you need to know about Value Added Tax
Pay more into your pension
Basic rate taxpayers in England will have their pension contribution topped up 20 per cent by the government. If you’re earning £100,000 or more, you can use pension contributions to reduce your taxable income and keep hold of your personal allowance.
Claim capital allowances
Capital allowances let you deduct some or all of the value of an item from your profits before you pay tax. You can claim this allowance on equipment and machinery and business vehicles such as vans, lorries or business cars. As you’re a sole trader, you may be able to use a simpler system known as cash basis.
The main types of capital allowance you need to know about are:
Annual Investment Allowance
Claim up to £1 million on certain plants and machinery.
100 per cent first year allowance
Claim the full sum on certain plants and machinery in the same year you buy it.
If what you’re claiming qualifies for more than one allowance, you’ll have to pick the one that is most suitable.
Bring losses forward
Speaking of cash basis, with this type of accounting, you can bring forward the losses of a nightmare-ish year and carry them against profits the following year to bring down your tax bill.
Claim on eligible expenses
Make sure you claim back on everything you can. This can include mileage on the vehicle you use for work, home office expenses and costs towards training courses that help you run your business.
Read more at What expenses can I claim through my business?
Apprenticeship Levy Allowance
The allowance reduces the amount of Apprenticeship Levy you have to pay by £15,000 over the year.
Employers not connected to another company or charity will have an Apprenticeship Levy allowance of £15,000 each year. If you are not connected to any other employer and your pay bill is not over £3 million you will not need to pay the tax.
Connected companies or charities will only have one £15,000 allowance to split between them. If you are connected to any other employer and your combined pay bill is below £3 million, you will not need to pay the levy.
Employment Allowance
With Employment Allowance, eligible employers can reduce their National Insurance liability by up to £10,500. You might be able to claim on previous years, too.
Tax relief on charity donations
Donations made by sole traders (as well as individuals) to charity or to community amateur sports clubs are tax-free.
The tax will go to you or to the charity. This depends on how you make your donation.
- Through Gift Aid
- Directly from your wages or pension through a Payroll Giving scheme
- Land, property or shares
- In your will
See the government website for more.
Read more for sole traders
6 examples of sole traders – What jobs are best if you want to go self-employed? We look at what it takes to become a personal trainer, a gardener, a hairdresser, a private chef, a photographer or a graphic designer
Best accounting software if you’re a sole trader – Here, we explore how to find the right accounting software for you as a sole trader, along with some of the best platforms around
Best business bank accounts for sole traders – We’ve rounded up some of the best business bank accounts created with sole traders in mind
