Part 1: 

Self employed and not sure how to cut down on your taxes easily? 

This guide is for you!

 
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There are 3 ways you can calculate how you can cut down on your expenses, which I have explained for you below:

1. SIMPLIFIED EXPENSES

Simplified expenses has been launched during the 2013/14 tax years for sole traders is a new way to do taxes and indeed will make your life much simpler. This is a way of calculating your allowable expenses using a flat rate system.

The 3 main categories that Simplified Expenses can be used for are:

a. Vehicles

3 different rates apply if you own and drive a car for your business:

  • Cars & goods vehicles first 10,000 miles: 45p per mile

  • Cars & goods vehicles after 10,000 miles: 25p per mile

  • Motorcycles: 24p per mile

So if you are self employed, and used your car for 12,000 miles, you will be able to claim £5,000 (45p*10,000+5p*2,000)

b. Working From Home

Again, there are 3 different rates you can apply for if you work from home:

  • You’re working 25 to 50 hours per month from home: £10 pm

  • You’re working 51 to 100 hours per month from home: £18 pm

  • You’re working more than 101 hours per month from home: £26 pm

So for example, you’re a designer and worked 30 hours from home for 9 months and 60 hours for the other 3 months, you will be able to claim £144 (£9*10+3*18).
 

c. Living at Your Business Premises

Again, 3 different rates you can use to claim if you are living at your business premises (bed&breakfast for example) depending on how many people are living in:

  • You’re alone means you can claim £350 per month

  • You‘re two persons means you can claim £500 per month

  • You’re three  or more, then you will be able to claim £650 per month.

There are other type of expenses that you can claim, which here will depend on the amount you have spent.

 

2. CAPITAL ALLOWANCES

This section is for you if you buy and keep assets for your business which are usually pretty expensive, and are expected to have a useful life of 2 years or more. They tend to more or less fall into 3 main categories:

  • Equipment
  • Machinery
  • Business Vehicles eg. cars, vans, lorries.

Other capital allowances include:

  • Renovating business premises (particularly in disadvantaged areas of the UK)
  • Extracting minerals
  • Research & Development
  • ‘Know-How’ (intellectual property about specifically industrial techniques)
  • Patents
  • Dredging

Don’t get too excited though, there are things you cannot claim Capital Allowances such as:

  • Things you lease  as you must own them.
  • Buildings, including doors, gates, shutters, mains water and gas systems
  • Land and structures, eg. bridges, roads, dock
  • Items used only for business entertainment

You can use the following HMRC link to work out your capital allowances and what you can claim on your Self Assessment tax return: work out what Capital Allowances you can claim.
To work out the value of an item, you base it either on what you paid for it, or in the event that you owned it before you started the business or it was a gift, then what the market value of the item is if you were to sell it now.

If an item qualifies for Annual Investment Allowance (AIA) then you can deduct the full value of that item before tax. Note: If you later sell that item a er already claiming AIA, you may need to pay tax on it. You can claim AIA on most things that are considered ‘Plants and Machinery’ except for cars, gifts or items owned for another reason before being used in your business - these things you can claim using Writing Down Allowances.

Note: You can also use Writing Down Allowances if you’ve already claimed AIA on items worth a total that surpasses the AIA limit for the accounting period, or if you don’t want to claim the full value of an item, but only part of it.

If an item qualifies for First Year Allowances, you can also deduct the full cost from your profits before tax. Note: This is separate and will not count toward the AIA limit.
Please Note: If you’re a sole trader with an income of £150,000 or less a year, you may be able to use a simpler accounting system instead called Cash Basis.

3. CASH BASIS

Cash Basis is another way to record income and expenses, in order to work out your profit and how much tax you owe. It’s a method which only requires you to record income you actually received in a tax year (not money you’re owed or haven’t yet received). If you run a small business, Cash Basis accounting may be easier and better suited to your business.
Cash Basis will not suit your business if you:

  • Claim interest/bank charges of more than £500 as an expense.
  • Run a bigger business with high levels of stock, etc.
  • Are looking to finance your business with a bank, as they might ask to see your accounts using traditional accounting, before agreeing to a loan, ie. to see what you owe and/or are due.
  • Have losses that you wish to offset against other taxable income (colloquially known as “sideways loss relief”).

I hope that you enjoyed reading through the 3 methods you can use to calculate how much taxes you owe. Interested to know more what type of expenses you are allowed to claim? Then click on the link below:

You already feel ready to expense, and are looking for an Free App to store all your receipts? Then click on the link below: