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The Savvy Scot

Personal finance and lifestyle blog

Finance Facts for the Self-Employed: Ways to Avoid Overpaying Your Taxes

By Pauline

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Most self-employed people overpay on their taxes. So, here’s some tips to help you avoid that without running into trouble with HMRC.

Spread Out Your Income Tax Payments

Every member of your family who is able to work will have a personal allowance of £9,440. So, if you’re earning more than the 20 pc tax rate band on income, then you can hire out your spouse, or children, to keep your books, pay them an income, and take an allowable deduction expense for yourself.

Don’t Forget The Personal Allowance In Your Old Age

When you’re working as a self-employed businessperson, why subject yourself to the maximum tax rate? You can continue to pay your spouse and children for working in the business, spread your income out among then by giving them a pension, and then the income stays in the family. It’s the same income, but everything is taxed at a lower rate.

Schedule Your Salary As a Dividend

The most common way to make salary payments is through either a salary scheme or through dividend payments. A salary payment is an allowable deduction, which reduces the company’s tax. A dividend is not allowable for corporation tax purposes, and is treated instead as a distribution of profits.

When paying dividends, you need to pay all shareholders of the same class of shares. And, for legal purposes, you must pay it out as a distribution of profits. One downside is that, by taking payment as dividends, you are not entitled to pension fund benefits and sickness insurance.

This could also pose a problem for employees if they want or need access to insurance benefits, but they are shareholders in the company and are being paid dividends.

In some cases, employers could be accused of abusing employees and cheating them out of entitlements. You can find out more about the types of claims employees can make on the Claims Direct website.

Claiming R&D

A company can now receive up to 225 per cent relief against their corporate tax if the company was involved in a significant increase in research and product development. Filing for the claim is a difficult process, but don’t discount it. You may qualify even if you think you don’t.

Enterprise Management Incentive

The EMI is a share option that gives you special tax treatment. You’re allowed £120,000 of stock options to be given to an employee with no income tax assessed. Not all employees are eligible, however, and performance conditions can be added which must be met.

Insure Yourself

One way to avoid taxes is to reduce or eliminate your income. Most people see this tactic as being quite drastic. But, when you’re self-employed, you are vulnerable to periods of unemployment.

If you self-insure, your premium payments won’t be tax exempt, but your benefit payments will be. This holds true for life insurance cover where you’ve purchased life insurance policies with cash value benefits.

Steven Hill is a freelance tax advisor and business consultant. He is always more than willing to share his tips and insights online. His observations and suggestions on a number of topics can been found on B2B and other relevant sites.

Filed Under: Money Tagged With: Overpaying Your Taxes, self employed, taxes

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