Whether you’re an employee or self-employed, there are numerous ways to legally reduce your tax bill through tax relief and planning ideas. We explain how simple checks can increase your take-home pay with little effort, as well as how to take advantage of government schemes and tax reliefs.
Here are ten simple tips and tricks to help you reduce your tax bill and put more money in your pocket.
For company and employees
- Investing in a Pension scheme: Employers and employees can benefit from investing in pension contributions. Contributions to an employee’s pension qualify for corporate tax relief and are exempt from income tax and national insurance for the employee (up to certain limits).
- Claim tax-free childcare.
You can claim back 25% of your childcare costs up to £500 every 3 months under the tax-free childcare scheme. It would help if you met certain criteria, such as having a child under 11 and earning less than £100,000 per year.
Additionally, your employer may be willing to implement a salary sacrifice childcare scheme. These are simple to implement and can result in significant savings for both employees and employers.
- Use the starter rate for savings
If your income from a job or pension is less than £12,500 in 2020-21, but you earn money from savings, you may be eligible for the starter savings allowance. Interest earned up to £5,000 is tax-free. This is also your personal savings allowance so that you could earn up to £18,500 before taxes.
- Patent Box
The Patent Box regime allows companies to own patents and use them in their business to considerably reduce their tax burden. Profits from qualifying patent interests are taxed at rates as low as 10% under the regime, resulting in effective tax rate savings.
Companies must take some action now to learn how to advantage of the regime and what business changes may be beneficial.
- Enterprise Investment Scheme (EIS)
EIS is intended to assist smaller, higher-risk trading companies in raising capital by providing various tax relief to investors who purchase new shares in those companies.
Individuals can obtain income tax and capital gains tax reliefs on EIS-eligible companies’ investments if certain conditions are met.
For self-employed individuals
- Tax Credits
For self-employed individuals with varying or fluctuating profits, a protective claim for tax credits must be considered. This is especially true in the context of the present economic climate.
Tax credit claims can only be made one month in advance and must be made annually.
- Income shifting
Married couples should prefer transferring income-generating assets to their spouse or civil partner to utilise their respective tax-free personal allowances fully.
This exercise is also useful if one partner pays income tax at a higher/additional rate, and the other is a non-taxpayer/basic rate taxpayer.
- Increased cash flow
As a self-employed individual, you can choose when your accounting year ends as a business owner, and it’s important to do so carefully. You’ll have more time to pay taxes on your profits if you choose an accounting year-end date earlier in the tax year.
This means that as your profits grow, your tax bill will grow at a slower pace. The more time you have, the less likely it is that you will be unable to pay your tax bill on time.
- Transfers that are exempt from inheritance tax (IHT)
With the nil rate band being frozen in recent times, gifting during one’s lifetime has become more essential.
For IHT purposes, typical exempt transfers include
- The yearly transfer of £3,000,
- Small gifts of up to £250,
- Gifts on the occasion of marriage, and
- General expenses out of income.
- Deductions for tax purposes
Several business expenses can be deducted from profits, lowering your overall tax. This could include things like phone bills, fuel, or the cost of running your home office.
Winding-up
Every business is unique and requires tax planning every month. This can only be possible by hiring tax accountants who are highly experienced and professional in this field, ultimately assisting companies and individuals in reducing their tax liabilities by analysing certain deductions and exemptions they are eligible for.