Being a freelancer gives you so much in the way of freedom – be it personal, creative and entrepreneurial. However, by becoming more tax efficient you could help improve your overall freelance experience. This article will outline three key areas in which greater tax efficiency could help improve your freelance business experience.
One – Expenses
As a freelancer, you have the ability to claim back the cost of doing business in the guise of expenses. This can greatly improve your freelance business experience. For the uninitiated, expenses are the costs of operating your business – this could mean building and launching a website, buying some office furniture or paying Google for some PPC ads. Here are a few more costs that can be expensed:
- Travel Costs – Petrol for your car, rail tickets to a business meeting or renting a Boris Bike in London to beat the traffic to that sales pitch
- Staff Costs – Has ‘project creep’ invaded a big project and do you need to subcontract out elements? This can be included in your business expenses
- Office Costs – Do you need to rent space? Hotdesk to help improve business productivity by reducing those ‘working from home days in pajamas’ by giving you a professional workspace to help conduct your business? This can be added to your business expenses
- Stationary Costs – Business cards, pens even a laptop computer or iPad could be claimed as business expenses
What this all means is that if your business earns £25,000 a year and you have ‘allowable’ expenses (and we’ll get to this later on) that means your taxable income is only £20,000. This means legitimate expenses can help to reduce your overall tax burden. However, HMRC only allows “allowable’ expenses – so a family holiday to Florida can’t be expensed (even if you did finish some work on a laptop). Likewise, you cannot expense a PlayStation or Xbox gaming console and expense it as a ‘video conferencing device’ as one enterprising individual tried to do. Always speak to your accountant about allowable expenses.
There is a big ‘grey area’ when it comes to homeworking. This is because of the dual purpose of the home space and it therein becoming a workplace. If you do homework and want to expense costs you should always discuss this with your accountant. The rules are complex for home working and expenses – you can claim a portion but that will all depend on the percentage of costs associated with the space you designate as your workplace and the time spent in that locale.
Two – Donate To Charity
If you’re lucky enough as a freelancer to be a higher rate taxpayer (40%), you could help to reduce your overall tax bill by including charitable donations to your tax return which will incur tax relief. By doing good with your success you can help donate to homeless charities or cancer charities who are helping to change the world whilst also personally benefiting from tax relief.
Three – Become A LTD Company
Another way tax simplification could help improve your tax affairs is by incorporating your business entity as a Limited company. This is especially pertinent if you are a higher-rate taxpayer as you could reduce your higher-tax paying rate by incorporating. You could pay yourself a basic rate on income £0-34,500) and the rest of your profits could be appropriated as dividends – paid to shareholders. These are taxed at 7.5% for those on the basic rate. Therefore, there is a big tax benefit to being an Ltd company as opposed to self-employed freelancers.
Finally, Get Help & Call Prestige Business Management Today?
At Prestige Business Management, we understand freelancers, a lot of our clients are successful freelancers and we provide great value and insight to our clients. We also help to digitise our clients by giving them access to digital tools that can help visualise their financial affairs and help improve their overall understanding of their business successes. We can also help you understand expenses – what you can and cannot claim and if you do homework we can help you breakdown the expenses barriers to help make homeworking worthwhile.
Give us a call today on 0203 773 2927 to take advantage of tax simplification hints and tips outlined above for successful freelancers.