Freelancers who are newbies in the field of freelancing often have difficult times in terms of tax planning. Here are the top 10 tax planning steps for freelancers.
1. Establish a limited company
Freelancers that desire to maximize their income legally should set up a limited company. A limited company is a distinct business entity from the owner and is regulated by the Companies Act 2006. Contractors will find additional administrative requirements and responsibilities when running a limited company. However, they can save more in comparison to PAYE or being a sole trader.
2. Register the limited company on VAT’s flat rate strategy
Contractors can save tax in certain circumstances. The flat rate strategy allows a contractor to pay a VAT’s fixed amount based on turnover. The profession/trade dictates the fixed rate and is regulated by HMRC. Contractors can only apply this method if the turnover is expected to be lower than £150,000 (excluding VAT) over a 12 month period.
3. Contractors must claim their allowable expenses
Freelancers must be knowledgeable on the expenses that they can claim. A corporation tax relief of 20% can be claimed by the limited company.
4. Claim the Employers National Insurance Allowance
Freelancers are subject to Class 1 ‘Employers’ national insurance owed by their limited company. The rate of 13.8% is the percent levied on the employer’s national insurance. This includes the salary of director and employee that amounts to up to £42,385 p/a.
5. Obtain the AIA on capital assets
The first year capital allowance involves a capital asset that includes particulars such as furniture, fixture, hardware, and laptops. This is similar to an expedited depreciation charge that gives tax relief in the year it was purchased.
6. Follow IR35 rules
IR35 is the law that regulates contractors and freelancers based on their work is set up. It is very difficult to be under an IR35 inquiry or to be found inside IR35 and not pay taxes accordingly.
7. Submit files and data on time
Data and VAT returns must be submitted on time. HMRC and Companies House might levy fines on companies that submit data late.
8. Entrepreneur’s relief
Contractors who are closing or selling their limited company can obtain entrepreneur’s relief. This can be applied to the remaining funds in the company to be taxed at only 10% after all the means of taxation have been used.
You can ask for a free initial consultation with our company regarding tax planning for freelancers.