Tax year-end tips for self-employed workers

Tax year-end is an important time for most of us, but the case is particularly strong if you’re self-employed.

Being your own boss has several upsides, notably that you have greater control over the volume of work you take on, and ultimately how much you earn. You also have more options at your disposal when it comes to tax planning - a task that should be racing up your list of priorities as April draws closer.

• Invest with ii: Open an ISA | ISA Investment Ideas | ISA Offers & Cashback

Here I examine some of the ways you can keep the taxman’s hands off your hard-earned profits.

For the purposes of this article, I’ve included single owner/directors of private limited companies under the self-employed banner.

I understand this group isn’t technically classed as such by HMRC, but if you’re a freelancer or contractor with no employees who operates as a limited company, you may still describe yourself as “self-employed”. And it’s important to understand the financial planning options available to you as many differ to those for sole traders.

1) Review your pension payments

Whether you’re a sole trader, in partnership with one or more others, or run a limited company, finding ways to minimise how much the taxman grabs from your profits will be a chief aim right now.

A great way to thin your tax bill while delivering a boost to your financial future in the process, is to make pension contributions - especially if you’ve enjoyed a bumper year and have surplus profits.

• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
• Self-employed? Here’s the best way to save for your retirement

This is an area where your company structure is important as it can influence the most tax-efficient way to save into a pension. Let’s look at the option of each structure.

• Sole traders and partnerships

In short, if you’re a sole trader or in partnership, the only way to pay into a pension is to make personal contributions into something such as the interactive investor self-invested personal pension (SIPP).

As long as you’re aged 75 or younger, you can usually contribute the lower of 100% of profits or £60,000 and get an immediate 25% boost in the form of basic-rate tax relief.

And if profits exceed £50,270 or £125,140, you might be able claim back an extra 20% or 25%, respectively, on the total contribution (net payment plus basic-rate tax relief) via self-assessment.

But a note of caution here - you must remember to reclaim the tax. Thousands of people fail to do this every year and lose out on what is essentially free money.

• Private limited company directors

If you own and run a limited company, you have a couple of options when it comes to pension funding. You can either make personal contributions as laid out above or pay via the business.

If you choose the latter, payments can be made from pre-tax profits, thus trimming your corporation tax bill. The saving here could be as much as 25%. What’s more, if you planned to draw that money as salary, you’ll save national insurance too.

Importantly, the 100% of earnings rule does not apply. So if you draw a small salary and take the rest in dividends for tax purposes, you can still pay up to £60,000 into a pension and get corporation tax relief.

And unlike personal pension contributions, where you need to be under age 75 to benefit from up-front tax relief, there is no age restriction on company contributions to save corporation tax.

So let’s say you’re aged 78 and semi-retired but still run and own a limited company. You can make pension payments from the business and trim its tax bill.

This could help add some extra years to your drawdown pot or provide some additional funds to spend and enjoy retirement while you’re still fit and healthy.

Understand your accounting dates…

It’s possible that your company’s accounting period differs from the official UK tax year. For instance, it may run from 1 January to 31 December or 1 April to 31 March. This means that, to offset pension contributions against this year’s corporation tax bill, you must make the payment before the end of your accounting year.

2) Put your surplus profits to work

If your business account is bulging with cash, and you don’t plan to touch the money for several years, it can make sense to invest for your long-term future.

For sole traders and partnerships, as surplus profits are considered personal money, you can invest up to £20,000 before 5 April into an individual savings account (ISA) allowance and shield any future gains, dividends and interest from HMRC.

While you can’t invest limited company funds in ISAs (they can only be held in individual names and limited companies are a separate legal entity), you still can invest the money in the stock market. Directors can, of course, invest their personal money into an ISA.

• Six big pension changes to expect in 2024
• Six savvy tax tricks to save you money in 2024

Investing limited company money isn’t strictly an end-of-tax-year exercise, but there can be some tax advantages to this approach. It can also improve returns on your cash reserves, especially if inflation outstrips the interest your company money earns.

There are, however, some things to be aware of. Investing spare company money in something like a general investment account (GIA) does not qualify as a trading expense, so you won’t get corporation tax relief unlike pension contributions.

Your capital reserves will also be subjected to the inherent market ups and downs, and you may get back less than what you invest. It’s imperative that your business doesn’t plan to use the money in the next five years.

But if you decide this is right for you - although due to the complexity and potentially knotty tax implications, it’s wise to seek expert advice from a financial planner first - you can open a company account with interactive investor. This allows your limited company to invest in a diverse range of investments, including UK and international equities, funds, ETFs, and investment trusts.

3) Buy things that your business needs

If you need to replace or upgrade any business equipment, then now might be a good time. So, if your laptop has seen better days, the purchase price of a new one can be deducted from your profits as an allowable business expense. The key thing here is to only buy things that you actually need, either immediately or at some point in the near future. You should avoid buying anything for the sake of it.

• Five ways to build your wealth if you’re self-employed
• The power of two: tax year-end planning for married couples

To qualify as an allowable business expense, anything you buy must be incurred “wholly and exclusively” for the purposes of your trade. Pension contributions typically fall under this definition.

And business owners recently received some good news on this front. At his 2023 Autumn Statement, Chancellor Jeremy Hunt extended full expensing relief from three years to indefinitely. This allows companies to claim 100% capital allowances on qualifying plant and machinery.

Timing here can be important, though, as you can’t backdate claims.

4) Make charitable donations

Admittedly, this is more virtuous than savvy, but if you have spare profits and are in a generous mood, then gifting money to a worthy cause can make a positive difference and you get tax relief, too.

In most cases, you receive gift aid which tops up your charitable donation by 25% - the charity then claims this back. And like with pensions, if you’re in either the 40% or 45% tax bracket, you can claim back extra via self-assessment.