Tax bills can be an awful surprise at the end of every year, particularly if you typically earn over the threshold for your tax-free allowance. Whether you’re an employee or you’re self-employed, taxes are often the bane of your year. On the off chance that you don’t prepare for your taxes, you may find yourself with a hefty bill.
Simple checks could raise the amount you are able to take home each year, while lowering the amount that you’re asked to pay back. When you’ve acquired your costs and payments in their entirety, there are several things that you should check before submitting your return.
Taxable Allowances
First, check your tax code and how much you can earn tax-free for the year in question. This amount typically rises every year, and for 2019-2020, the personal allowance of tax is £12,500; a rise of £650 from the tax year before. If you don’t utilise this amount properly, you could easily lose out. For those that are usually under this tax bracket, you will have little to worry about, but for those that go over it, tax bills can become quite steep.
In the event that you do earn over £12,500 this tax year, you will need to understand how to diminish your bill by looking at your expenses and recording them for your tax form. Depending on your expenditures during your working year, you may not pay a penny towards your tax assessment.
Understanding How To Reduce What You Owe
Suppose that you have £15,000 in earnings across your tax year. You would pay 20% tax on the earnings above £12,500. Meaning that on the other £2,500 you have earned, you would lose £500. So, overall, you would have only earned £14,500. Though that loss may not seem particularly high, imagine if you had earned quite a bit more than that – the loss goes up and up.
However, if you can highlight business expenditures on your tax form that are equal to or more than the amount you should lose, then you can wipe out the amount that you would otherwise owe. For example, you are self-employed, and you have spent £500 on business travel, stationary, and office equipment that tax year. Because these things are counted as business expenses, they can be removed from the amount you owe.
Of course, for higher rate individuals – those on the upper tax brackets – it is significantly more difficult to cover the entirety of the amount owed through business expenditures. In this case, it’s best to carefully go over your numbers a few different times to ensure that you are deducting the right amount. If you are a business owner with other employees (whose pay comes out of your business’ earnings), remember to take this into consideration, as well.
The point of this is to make sure that you aren’t paying more tax than you should be. Tax bills can seem extremely high before any deductions are made – but those deductions are crucial, because they reduce the amount of money you will need to pay back that year.
If you would like to find out more about reducing your tax bill, just get in touch with us today.