The great thing about being a freelancer, rather than an employee, is that it can be a much more tax-efficient way to make money. As an employee, tax is automatically deducted from your gross salary, whereas, as a freelancer, certain expenses are tax deductible — meaning you get to pay less tax.
In this article, we’re going to look at how to be more tax efficient as a freelancer, and part of that is to offer a guide to expenses that can be claimed back as a tax-deductible business expense.
That said, it’s important to define the fact there’s a huge difference between ethically reducing the amount of tax you pay by being tax efficient, versus, trying to get away with not paying tax; which is known as tax evasion.
On this point, it’s worth noticing that HMRC in the UK and the IRS in the US both have extremely substantial powers to investigate and freeze assets such as your bank account. Indeed, some say that the HMRC have more power than the police, in some respects, so it’s worth thinking twice before trying to dodge having to pay taxes … even if you’re just a small business barely turning over a profit.
This is particularly pertinent given the fact so many expenses are tax deductible, and as you tend to only pay tax on your net profit / earnings — it’s wise to consider how you can reduce the amount of tax you need to pay rather than try to avoid it all together.
1. SPREAD OUT THE WEALTH
If you run a family business, each member of your family who is able to work will have a personal allowance — which means an allowance they are able to earn without being taxed on their income. Therefore, you could employ a family member, such as a partner, to do a job such as administration — rather than doing it yourself, as then you would have double the amount of tax-free income allowance.
Similarly, if you have children, you could have them work at weekends and in the school holidays in order to earn their keep. This way, these wages are a tax deductible expense against your business profits.
2. KEEP RECEIPTS
There are a vast amount of expenses that can be considered ‘business expenses’ that presuming they are linked with business can be claimed — for instance, if you wanted to treat your staff to a one-week holiday in the Bahamas as a bonus for all their hard work, this would most likely be a tax deductible expense — particularly if you incorporated an element of training within the trip.
Evenings spent entertaining clients, laptops, even cars — these can all be claimed against your business profits, meaning you will pay less tax, as there will be less profit.
3. HIRE THE BEST PEOPLE
You don’t want to get yourself bogged down in accountancy issues, it’s much better to hire the best people available to take care of this issue. In addition, the more people you hire, particularly as freelancers or consultants, the simpler your tax becomes rather than having people in-house which comes with a heap of administrative and legal responsibilities.
