How do i reduce paying 40% Tax deductions

[xe300]

I am a sole trader in 2nd year of business working from a home office as a technical consultant.
After a good first year i am entering the 40% higher Tax bracket earlier than last year, what can i do to reduce the amount of income that comes under this higher tax bracket ?
My running costs are less this year after the initial start-up year.

Must i re-invest in more:
Pension?
Capital Costs - PC & Media?
Purchase of private car for business use (have only claimed mileage last for last year)?
Further education/training courses etc?
Office or Training Demo equipment?

I am aware that i have to remain under the 79K Income as a sole trader because of VAT accounting reasons but is it more advantageous to account VAT of my own free will if my income is going to be in the higher tax bracket each year but under 79K?

I do not intend to expand my company or employ other people, i am happy enough to take on the work load that i have each year which is enough for one man.

My high Income evolves mainly from high travel costs(europe) which i obviously invoice the customer.

Any tips on how to make pre-tax cost deductions will be appreciated.

 

[Newchodge]

If your high income is from high travel costs which you invoice the customer, presumably you have to pay these costs out as well, in which case they should have a nil impact on your profits.

 

[Alan @ Cloud Accounting]

Two solutions spring to mind, both of which involve forming a company, and dependent on your circumstances, neither of which might be any use to you.

1.) If you're married, and your wife earns less than £41k pa consider making her a shareholder in your company. Then some of your income can be paid t her thus reducing your income in the higher rate bracket.

2.) Defer taking all of your income from the company. You'd only pay tax on what you withdraw and then you can choose to withdraw it (a) when it suits you better or (b) when the business is finished you can take the income as capital taking advantage of CGT exemptions and entrepreneurs' relief.

 

[xe300]

If your high income is from high travel costs which you invoice the customer, presumably you have to pay these costs out as well, in which case they should have a nil impact on your profits.

Thankyou, I understand that part, that part of my information was intended to show the juggling act i have to keep under the 12 monthly rolling annual limit as a sole trader without becoming forced to Invoicing VAT and involving more accounting time and costs.

 

[Alan @ Cloud Accounting]

I am aware that i have to remain under the 79K Income as a sole trader because of VAT accounting reasons but is it more advantageous to account VAT of my own free will if my income is going to be in the higher tax bracket each year but under 79K?

Utilising the VAT Flat Rate scheme might actually improve your lot. Depending on who you are invoicing. But the reinvoicing of travel expenses can put a spanner in the works.

 

[UK Contractor Accountant]

If you do a lot of travelling how about buying a light aircraft for business use!!!

Seriously your Accountant will be the best person to consult on this issue - he/she should know what is currently being claimed and offer advice on further tax deductions on employing staff members, allowances on cars/vans/double cab pickups, tax savings on incorporating the business etc.

 

[UK Contractor Accountant]

Ifoffer advice on employing staff members, allowances on cars/vans/double cab pickups, tax savings on incorporating the business etc.

Employing family members is the issue - wife, girlfriend, mother/father, teenage sons/daughters.

 

[Mitchells Bristol]

Another vote for forming a limited company - likely to save you around £4,000 in tax per year, combined with potentially making pension contributions and capitalising goodwill on incorporation (to the extent it is not personal goodwill).

 

[Paul Norman]

Tax affairs can become complex, can't they!

I would strongly recommend getting your accountant to advise you on the most tax efficient way of arranging your business.

I did wonder, since the source of your high income is travel charges, whether you are properly allowing the cost of that travel against that income. It is profit that incurs tax, not revenue.

 

[Walkol]

On the face of it, going limited seems the best option. You can control much better what you get taxed personally be delaying and controlling the amount of income, pensions etc.

However, you really need to sit down with a good accountant to check this.

Also, as mentioned, if you clients are generally VAT registered, going VAT with flat rate scheme could potentially be "free" additional income.

 

[Ola1]

As has been mentioned above,

My high Income evolves mainly from high travel costs(europe) which i obviously invoice the customer.

The above quote makes one wonder whether you had accounts produced to verify that your income is indeed what you think it is

 

[xe300]

Tax affairs can become complex, can't they!

I would strongly recommend getting your accountant to advise you on the most tax efficient way of arranging your business.

I did wonder, since the source of your high income is travel charges, whether you are properly allowing the cost of that travel against that income. It is profit that incurs tax, not revenue.

Thankyou everyone who has added comments to my thread, i have just got back from another overseas business trip.

here is some more information for you .....
As my main customers are overseas i have high travel costs which I in turn invoice the customer which is where i get my initial high income from.
These are tax deductables.

Flat rate VAT ?.... I think with the bulk of my customers being overseas (€) the invoices would not be suited for Flat rate VAT.

I make a rolling log of a 12 month of total Income so that i stay under the mandatory VAT limit.

Reference office help costs .... My wife works and brings home aprox £1400 on her own .... would this cause her Tax deduction disadvantages.

Being in the second year I have not been splashing my money around but before i start paying the higher rate of tax, i think I should be reinvesting some money in new PCs, presentation equipment etc.
Obviously this needs to be a clear business necessity ...Laptop, projector, phone and perhaps some new carpet in the bedroom office ?

Until now i have been claiming mileage but this year had to buy a £6000 car for business trips ..... should i be claiming this on a different calculation basis?

I just feel that i have not been informed enough about getting the best out of accounting for my business ...... hence i am considering a 2nd opinion from another tax accountant.

Thanks again for your enthusiastic support.

 

[Alan @ Cloud Accounting]

In my view:

If you're customers are chiefly overseas, you probably won't be charging VAT so if you were VAT registered you might be able to reclaim the VAT on your costs. Being VAT registered might therefore suit you better.

Your wife still has a considerable amount available in her basic rate band so ltd co apportioning some income would still work.

 

[UK Contractor Accountant]

Reference office help costs .... My wife works and brings home aprox £1400 on her own .... would this cause her Tax deduction disadvantages.

Her tax free allowance is £9440 per annum so there is scope to pay her through your business for admin support. Alternatively consider taking her on as a business partner and allocating her part of the business profits (alternative to the ltd co route but not as tax effecient).

 

[NickMoore]

You could also think about putting money in a SIPP (self invested personal pension) which you get tax relief on.