Tax advice for sole traders: How to minimise tax liability
As a sole trader, you’re likely running on a tight budget and managing a lot of the core functions yourself. Applying for the right tax deductions is key to minimising your expenses. However, given how complex tax regulations can be, figuring out what deductions you’re eligible for can feel stressful.
But don’t worry! In this guide, we’re offering some practical tax advice for sole traders to simplify their annual returns. By implementing these sole trader tax tips, you can stay compliant every year while keeping as much of your hard-earned income with you as possible.
Expert tax advice for sole traders to minimise tax
1. Understand your allowable expenses
If you’re wondering, as a sole trader: “What expenses can I claim?” you’ll be delighted to know that there are a large number! Essentially, legitimate business costs can be deducted from your sole trader income as allowable expenses before your tax bill is calculated. These include expenses like rent, utilities, equipment, office supplies, travel costs, professional fees, and so on. Remember to keep full records of all these expenses to support your claims when you submit them to HMRC. And if you aren’t sure whether an expense comes under sole trader tax-deductible expenses, ask your accountant to help you out.
2. Use capital allowances
Capital allowances give you tax relief for the wear and tear of the capital assets you use in your business. As a sole trader, there are three main types of capital allowances you’re most likely to be eligible for:
- Annual Investment Allowance (AIA) — This gives you full tax relief for qualifying capital assets purchased in a year (up to a certain limit).
- Writing Down Allowances (WDAs) —This gives you relief for the gradual decrease in value of certain assets over time. You can claim WDAs on any balance left over after you have used up your AIA.
- First Year Allowances (FYAs) — This gives you enhanced tax relief for certain qualifying assets in the first year of purchase.
As always, we recommend working with an accountant who specialises in sole trader tax help so that you can claim the most relevant capital allowances for your business.
3. Make pension contributions
Any pension contributions you make for yourself as a sole trader will be treated as allowable expenses. So not only are you saving up for a comfortable retirement, you’re also bringing down your current tax liability. Sole trader pension tax relief typically amounts to the highest percentage of income tax that you pay (as long as it does not exceed your earnings).
So if you pay £8,000 into your pension, the government pays £2,000 in tax relief, making for a gross pension contribution of £10,000. And when you include this gross pension contribution on your tax return, you can also claim a higher-rate tax relief from HMRC. Navigating these pension rules can be challenging, so we recommend consulting an accountant who can help you choose the right amount.
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4. Defer income and accelerate expenses
Did you know that you can “time” your income and expenses to minimise your tax bill for any given tax year? You can opt to bring forward legitimate business expenses to this tax year and then write them off, or wait to issue invoices until the next tax year. Of course, staying compliant with tax laws is of primary importance, so be sure to keep full records of everything and plan your timing carefully with your accountant.
5. Reduce payment on account
This is one of our most underrated sole trader tax tips. Payments on account are essentially advance payments towards your future tax liability, which you make in two instalments. If you have made significantly less income this year as compared to last year, you can apply to HMRC to reduce payment on account so that you do not overpay tax. As always, we recommend consulting with an accountant to optimise your payments on accounts.
6. Make a charity donation
Any donations you make to registered charities can be written off as sole trader tax-deductible expenses. This means that you get to bring down your tax bill while contributing to a good cause. As part of our tax advice for sole traders, we especially recommend making donations if you paid a higher tax rate last year and a lower tax rate this year, as you can still claim the higher tax rate as a relief. As always, make sure that any donations you’re looking to write off comply with HMRC regulations for tax relief.
7. Seek professional advice
As a sole trader, there are few better investments you can make than partnering with a qualified accountant. They’ll help you understand your tax obligations, take advantage of all possible sole trader tax deductions and relief opportunities, and prepare your tax returns in full compliance with HMRC regulations. At Affinity Associates, we help you with structuring tax plans, advising on capital allowances, representation during tax audits, VAT planning, bookkeeping, and so on.
Final words
When you’re a sole trader, every penny you spend counts. With the help of the tax advice for sole traders that we’ve outlined here, you can proactively bring down your annual tax liability while staying fully compliant with UK laws. In addition, we highly recommend partnering with a qualified accountant who can give you the tailored tax advice you need to stay on top of your finances.
At Affinity Associates, we help sole traders take charge of their tax planning and compliance so that you have more time to run your business profitably.
Book a consultation with us today to learn how we can help you.
