If you have started your own work at home business you will need to take a much more active role in managing your taxes as a self employed. Unlike with permanent employment, where your employee takes away PAYE and NI payments from your salary and pays HMRC, the taxes you’ll pay as self employed will vary greatly depending on how you manage your business. The goal is minimizing the tax you need to pay by using legitimate means and avoiding tricks or shortcuts that could land you with a tax inspection.
Claiming allowable self employed expenses is without a doubt one of the best ways of making sure that you don’t pay more taxes than necessary. However, this doesn’t mean at all that you should falsify your expense claims or claim for things that aren’t without a doubt a business expense. But if you incurr costs exclusively in order to run your business you can claim them against your business income, reducing your profits and so the amount of tax you’ll pay. Keep in mind that if you are making money off your expenses reports you are doing something wrong, and that you need to keep an invoice or bill for each claimed expense, so ask that cab driver for the bill if you plan on charging the trip as a business expense.
Contractors: Umbrella Companies Are Expensive
If you are a contractor working for an umbrella company you’ll be paying your own employee NI, and PAYE exactly the same as if you were a permanent employee (minus holidays and benefits). Not to mention the umbrella company fees. Despite their claims of extremely high take home an umbrella company is the best way of paying as much tax as possible. It’s great if you don’t want to deal with paperwork, and just want to send in your timesheets and get paid, but keep in mind that you’ll be losing a high percentage of your gross income to the taxman.
Choose The Right Type Of Company
When registering your company there are different legal forms it can take. You can register yourself as self-employed or sole-trader, and your business profits will be classed as personal income and taxed as such. Or you can register a limited company, and pay yourself a mix of dividends and PAYE salary, and pay business taxes on your profit at the corporation tax rate. Each has its benefits and its drawbacks, and you need to evaluate how much money you’ll be making yearly and how much paperwork you are willing to deal with, in order to figure out if sole trader or limited company is the best option for you.
Register For VAT Flat Rate
If you are a service company and your purchases are considerably lower than your sales you may benefit from signing up to the VAT flat rate scheme. In this scheme you will charge your customers VAT at the normal rate, and pay a considerably lower VAT rate on all your income (without having to do the paperwork to claim paid VAT against charged VAT). This can be a nice amount at the end of the year, and can, among other things, pay for your accountant. However, if you have a business that produces VAT goods from supplies, such as selling jewelry for cash, you won’t benefit so much from the flat VAT rate scheme.
Get An Accountant
The best way of making sure you pay as little tax as possible legitimately is by employing a good accountant. This way you’ll have impartial advice on what’s best in terms of company formation, salaries and dividends, and you won’t get fined because you filled paperwork late or incorrectly.