People are always looking for ways to pay less tax. Tax allowances are one of the most effective and legitimate ways to do it, helping to mitigate against a large tax bill.
These allowances are built specifically to reduce the amount of VAT, Income Tax or National Insurance Contributions that you pay.
Some are more commonly used and known than others.
Business rates relief
There are several types of business rates relief, though for sole traders there are some that are more likely than others to be applied.
These reliefs provide discounts on commercial property taxes in England, including options for small businesses, rural sites and charities.
The small business rate relief is the most commonly used one for sole traders. This offers a 100 per cent discount for a single property with a rateable value of £12,000 or less, with tapered relief available up to £15,000.
Capital allowances
Capital allowances are a form of tax relief for businesses. They allow an eligible business to deduct some or all of the value of an item from its profits before paying tax.
You can claim capital allowances on equipment, machinery or company vehicles, this is known more widely as plant and machinery.
The types of capital allowances are:
- Annual Investment Allowance (AIA) – The Annual Investment Allowance is the one most sole traders are likely to use. It allows you to deduct the full cost of qualifying plant and machinery from your profits, up to the annual limit. This can include things like tools, office equipment, computers and vans.
- First Year Allowances – Certain qualifying assets can be claimed at 100 per cent in the year you buy them. This currently applies mainly to zero-emission vehicles, electric vehicle charge points and gas refuelling infrastructure that meet HMRC’s criteria.
- Writing Down Allowances – If an asset does not qualify for the Annual Investment Allowance or First Year Allowances, or there is still some value left after making a claim, you may be able to claim Writing Down Allowances instead. Rather than claiming the full cost at once, you deduct a percentage of the remaining value each year.
Allowable business expenses
One of the easiest ways to reduce your tax bill is by claiming allowable business expenses. These are the everyday costs of running your business and they must be incurred wholly and exclusively for business purposes.
Common examples include:
- Office supplies and stationery
- Business insurance
- Travel costs, including fuel and train fares for business journeys
- Professional fees such as accountants and solicitors
- Marketing and advertising
- Phone and internet bills used for business
- Utility bills and rent for business premises
If you work from home, you may also be able to claim a proportion of household costs or use HMRC’s simplified expenses method if you qualify.
Keeping accurate records and receipts throughout the year makes it much easier to claim everything you are entitled to and reduces the risk of mistakes when it comes to completing your Self Assessment tax return.
VAT relief
If your business is VAT registered, you can usually reclaim the VAT paid on eligible business purchases.
This can help reduce your costs, particularly if you regularly buy equipment, stock or services for your business.
To reclaim VAT, you must keep valid VAT invoices and submit your VAT returns on time. Not every purchase qualifies, so it is important to check the rules before making a claim.
How can we help?
Many sole traders end up paying more tax than necessary because they are unaware of what they can claim.
Whether it is business rates relief, capital allowances or everyday business expenses, an accountant can help you decide what allowances are right for your business.
Claiming the right allowances is not about avoiding tax. It is about making sure you only pay what you owe and keep more money in your business to help it grow.
Are you a sole trader who needs support with allowances? Get in touch today!
