9 Self Employed Tax Saving Strategies that work
In this article I will share with you 9 tax saving strategies that have the potential to save you £61,923 in taxes.
If you run a business or work as a contractor you know how much of a pain tax returns are to fill in and how much of a bigger pain they are to pay.
You hire accountants and book-keepers to help you with it, and assume that they will eke out all the tax saving gains that are available to you. Sadly, that’s not always the case.
You see, most accountants usually need a bit of a nudge to get their tax-saving heads into the game. If you leave them to it, they’ll happily just do your books with minimal creative thinking.
It’s not their fault – they are two different parts of the brain.
In this article we teach you how to get the most out of your accountants and the ideas to go to them with.
Want to watch it instead? Check out our video version of this article.
Tip 1: become an accountant whisperer
Accountants, like with most people, need stimulation and a bit of push back to get going.
At your next tax return, don’t just send over your documents and then blindly submit whatever your accountant sends back. Instead ask him or her questions like:
Are there any other ways I can save tax?
When he says “not really” or “this could be a strategy but I don’t think it is relevant here”, you should ask “Any idea how can we make it relevant?”
“Are there any ways I can reduce corporation tax?”
“Can I be more efficient in how I extract out my profits?”
“Are you sure there’s no other way?”
“Are you sure?”
Polite challenges and open questions can unlock a lot of ideas – so don’t be shy to do it.
FYI, this is the same advice we’d give for using any professional services firm such as a lawyer or conveyancer. You do get some gems who will do all this themselves, but for many this approach will get a lot more out of them.
Tip 2: Switch to a Limited Company
If you are a sole trader, you should consider switching from being a sole trader to owning a private limited company. Tax on companies is much lower than tax on individuals, and as your business grows, the company stands a better chance of borrowing, and you can extract out in lots of tax efficient ways.
Crucial thing is – only do this if you’re genuinely growing as a business. If you run a relatively small business, then it is sometimes cleaner and easier to stay self-employed.
This is one to run the maths through with your accountant or do your own research. There's some great resources on working out whether or not you should switch to a limited company or remain as a sole trader.
Tip 3: Let the money sit in the business
Tip 4: Extract Money like a ninja
Tip 5: Create A/B shares like a Pro
After implementing tip 4, the most tax efficient route is through dividends. There are ways you can maximise how much you take out of the company.
If you’re married, split your shareholding. In the UK if you’re legally married, half of your company is owned by your spouse anyway if there’s ever a divorce settlement so you’re not really legally disadvantaging yourself.
It is generally sensible to create A/B shares or what is actually known as multiple classes of shares. This gives you flexibility on when you pay out a dividend to each person. If you both own the same class of shares, if you declare a dividend, you will have to pay all shareholders that own that class of shares.
If you own A shares and your partner owns B shares, you can just declare a dividend on B shares, for example. You don't know when you might need the flexibility.
Let’s think through an example: Sarah has a company and her husband is not working elsewhere and not utilizing his tax allowance. She has £100,000 to extract from the company.
She could implement tip 4 and get some money out via PAYE for her and her husband as long as he is gainfully employed by the company. That takes out £19,752 successfully without any tax incurred personally or by the business.
The remaining £80,248 can then come out as a dividend, split equally between the pair (£40,124 each). Assuming no other income, that will be taxed at 7.5%.
So that's just £6,018.60 in tax instead of £27,428.40.
Saved you over £21k there. Halfway to a Tesla (more on that in tip 9!) ;).
Tip 6: Home Rental Hacks
The next tip is to rent your property to your business.
If you personally own the premises, make sure you’re charging the market rent to the company, so that the company can get a corporation tax deduction on the rent, and you won’t pay any national insurance on the rental income.
This way, the effective rate of tax between you and the company creates about a 1% tax charge.
You’ll pay tax on it at 20% as an individual as income tax, but the company will get a 19% corporation tax deduction.
You then only suffer 1% tax when that money comes out. So if you do have premises that you own personally, and is used by the company, make sure you do this.
Oh, and top tip – If it’s your home you’re renting then make sure you don’t accidentally get your council tax reclassified to commercial. The way to avoid it is to make sure there’s no one specific room which is being rented.
Let’s assume you rent your home out at £1k a month. That’s £12,000 in the year, giving you a CT and NI saving of £2661.
Tip 7: Get a SIPP going
The next tip is to make sure you make an employer pension contribution.
If your company makes a pension contribution on behalf of your employee, you can get corporation tax deduction for that. You can make up to a max of £40k a year. This saves you £7600 in corporation tax.
This money can then sit in a SIPP which then can be subsequently invested.
Similarly, if you’re not employed and you’re saving into your own personal plan, the maths goes like this:
You pay £80 into your pension, and the pension company requests £20 from the government, so overall you get £100. If you’re a higher rate taxpayer, you can claim another £20 off your tax bill when you do the tax return.
The amount you receive from the government is based on the amount of tax you would’ve originally paid. So if you contribute in £40,000, you get an additional £10,000 top up. So that’s £10k free money.
Pensions are only taxed when you withdraw them when you retire. Pensions also grow tax-free. So as you build your wealth for the future, no tax is being taken off it as you go.
Then at retirement you can take 25% of your pot tax-free and then extract the rest out every year in a tax-efficient way.
You can read more here about what a SIPP is.
When it comes to a SIPP, there's broadly two routes:
1. Done for you; or
If you’re looking for a SIPP provider that does things for you, we hear good things about Pensionbee from our users.
The DIY route looks like going with providers like AJ Bell, Hargreaves Lansdown and similar where you can open a SIPP account with them and choose the investments yourself.
Here’s our detailed analysis of all the halal SIPP options in the market today.
Tip 8: Kids’ Schooling Expenses
Your child's nursery, private school or extra-curricular club fees can all be a means to tax-saving.
Say we have Dawood (father) & Dawood Sr (grandfather). If Dawood Sr was to give his grandchildren shares in the company, dividends paid to the child would be free of any tax as long as the children have no other income and the dividends do not exceed the personal allowance.
That allows you to get £12,570 out of the company to pay for school fees. There might be a bit of tax to pay on anything above that but we love this tip because it makes use of children's personal allowance which typically always goes unused.
This is ideal for people with family businesses. This is in the high-risk end of tax strategies though so definitely one to run by your accountant/tax adviser as there is a risk of HMRC re-categorising these shares.
Tip 9: The Electric Car Strategy
Yes, you’re hearing me right: get an electric car.
Electric cars are very efficient to put through the business.
If you buy it outright, you can claim a corporation tax deduction in full in year 1. So if you buy a £42.5k Tesla, it comes off you corporation tax bill in year 1, saving you around £8,075.
This is all about the benefit-in-kind legislation. Normally if you buy something from the company that you will use personally, HMRC makes you pay a tax called benefit-in-kind.
For electric cars, the BIK rate happens to be super low as they want to encourage low-emission cars. For tax year 22/23, the BIK rate for electric cars will be 2%.
You can work out the exact costings with a very handy BIK calculator for the Tesla 3 RWD Auto here. Feel free to change the car and model too.
At the company level, the company can get a corporation tax deduction on the car, and it can also deduct insurance and maintenance costs every year going forward.
The downside though, is if you then come to sell that Tesla, because you’ve already had that tax relief, you'll have to add the amount of your sale back to your corporation tax bill to then be taxed at the appropriate corporation tax rate.
Bear in mind that corporation tax rates are going up from 1 April 2023. So if you are planning to go the route of buying in full, it might make sense to hold off until 1 April 2023 so that your relief is the same when you buy and sell.
So it’s not permanent relief as you get taxed on the sale proceeds. However, overall, if you’re keen to drive a nice car, then this route allows you buy a decent car and save £9975 in tax for the privilege.
When we modelled a 5-year hold period, it resulted in a total cost of £15,515 for the privilege of driving a Tesla for 5 years. Not bad eh!
Note: you can also just lease an electric car and you pay the BIK on the lease amount. You get full corporation tax deduction on the lease amount.
So there we have it folks. That is the story of how you can avoid £61,923 in taxes in a single year with some extremely fast and perfectly legal moves.
As ever, please do your own research and talk to your accountant or tax advisor for your specific circumstances. Please also make sure you are genuine and not trying to game the system illicitly (HMRC will have you for breakfast otherwise).
There's a fine line between genuine tax efficiency and outright deceit - the latter is not Islamic and we strongly discourage it.
Here's another reminder that we have a video version of this article.