As a self-employed individual, you may also invest in other businesses. There are numerous tax reliefs and reducers available that can significantly lower your tax liability. These reliefs apply not only to your business income but also to any investments you make in other businesses, providing a valuable opportunity to maximize your tax savings.
Reliefs for both self-employed and investors through various venture capital schemes are outlined below.
Tax Reliefs for the Self-Employed
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Personal Allowance
What is it?
The personal allowance is the income you may have with no income tax payable. This is £12,570 for 2023/24 for most people.
Example
If your total self-employment income comes to £40,000, you will pay tax only on £40,000 -£12,570 = £27,430.
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Trading Allowance
What is it?
This relief here is such that the first £ 1,000 of your self-employment income is tax-free. Where all the self-employment income is below £ 1,000, one will not be obliged to register and file a tax return.
Example
If you earn £ 900 from your gig you pay no tax nor file a return. Similarly, if you are earning £ 1,500 you have the facility to deduct £ 1,000 as trading allowance instead of claiming expenses.
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Business Expenses
What is it?
A Self-employed can deduct allowable expenses from the business income in arriving at the taxable profit - expenditure on items like office stationery, journeys and equipment.
Conditions
This means that the expense must be incurred "wholly and exclusively" for the purpose of your business .
Example
It would, therefore, imply that once you have a trading income of £ 50,000 and your business expenses are £ 15,000 for office rent, travels and materials, then you pay tax only on £ 50,000 -£ 15,000 = £ 35,000.
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Capital Allowances
What is it?
Capital allowances are the means by which you can claim tax relief against certain assets or equipment purchased and used in the business. The Annual Investment Allowance means the full value of whatever qualifies can be deducted.
Example
Assume you had spent £ 5,000 on a computer and office furniture, you can claim the whole amount for capital allowances and such reduce your taxable profit by £ 5,000 .
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Loss Relief
What is it?
In case your business incures a loss, you are allowed to carry losses forward or to carry losses back in order to reduce your taxable income.
Example
Where you incur a loss, say £5,000 this year you might have made profits of say £20,000 last year. You may carry that loss back to set off against your previous tax liability.
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Pension Contributions
What is it?
This would mean that through paying into a pension you get tax relief on the money that you pay into the pension scheme therefore reducing your taxable income. For the year 2023/24 you can contribute up to £60,000 and receive tax relief.
Example
Imagine you earn £45,000 and pay £5,000 into a pension; this would mean that you are only paying on £40,000.
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National Insurance Contributions (NICs)
What is this?
As self-employed, you pay both the Class 2 and Class 4 National Insurance Contributions NICs. If your profits fall below threshold limits, you either would not pay it or are given reduced rates .
Example
In the case of 2023/24, for Class 2 NICs if your profit is below £ 12,570, you pay nothing. For Class 4 NICs, for those below £ 50,270, the rate is only 10.25%.
Tax Reliefs for Investments
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Enterprise Investment Scheme
What is it?
The Enterprise Investment Scheme is a scheme devised to assist small, high-risk businesses by giving tax relief to the investor.
What reliefs are available?
- 30% Income Tax Relief on investments of up to £1 million - or £2 million if at least £1 million is invested in "knowledge-intensive" businesses.
CGT Deferral if you reinvest gains into EIS shares.
CGT Exemption, provided shares are held for at least three years.
Loss Relief - losses can be set against income or capital gains.
Example
You invest £50,000 into an EIS company. You can claim 30% income tax relief thereby reducing your tax bill by £15,000. If you sell the shares after three years, any profit you make is CGT free.
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Seed Enterprise Investment Scheme (SEIS)
What is it?
Even larger reliefs are available for investment under the Seed Enterprise Investment Scheme in companies which are at a very early stage.
What reliefs apply?
- 50% Income Tax Relief on investments up to £200,000.
- 50% CGT Exemption if gains are re-invested into SEIS shares
- CGT Exemption on any gains from the SEIS shares-if held for at least three years.
Example
You invest £20,000 in a start-up under SEIS. You can immediately claim £10,000 as income tax relief and you will enjoy the benefit of 50% CGT exemption upon sale of the shares after three years.
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Venture Capital Trusts (VCTs)
What is it?
Venture Capital Trusts (VCTs) are companies which invest in small and growing businesses. If you invest in VCT shares you obtain considerable tax advantages.
What reliefs are available?
- 30% Income Tax Relief available on investments up to £200,000 per year.
- Tax-Free Dividends from VCTs.
- CGT Exemption on sale of the shares in VCTs.
Example
You invest £100,000 into VCT shares and claim £30,000 as income tax relief. If the VCT pays dividends, then they are tax-free and any gain made upon the sale of those shares will be CGT-free.
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Social Investment Tax Relief (SITR)
What is it?
Social Investment Tax Relief - This incentivises investment in social enterprises through EIS-type tax reliefs.
What relief is available?
- 30% Income Tax Relief for investments in qualifying social enterprises
- CGT Deferral where gains are reinvested into SITR-qualifying investments
- CGT Exemption after holding shares for three years
Example
You invest £25,000 in a social enterprise. Tax relief: you get 30 per cent so knock £7,500 off your tax bill. Gains after three years are CGT-free .
Other Less Well Known Tax Reliefs
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Marriage Allowance
What is it?
If you're married, or in a civil partnership, the *Marriage Allowance* lets you transfer some of your unused personal allowance - up to £1,260 - to your spouse if they earn less than the personal allowance.
Example
If you earn £10,000 and your partner earns £30,000 you might be able to transfer your unused personal allowance to them, cutting their bill by up to £252.
13. Tax-Free Childcare
What is it?
Tax-Free Childcare- the scheme whereby for each working parent and/or self-employed 20% will be added by the government to the contribution made by the parent towards childcare costs.
Example
For every £8 you put into your childcare account, the government will add £2 up to a maximum of £2,000 a year per child.
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Remittance Basis (for Non-Domiciled Individuals)
What is it?
If you are UK-resident but not domiciled you may elect for the *remittance basis* where you pay UK tax only if you bring income and gains into the UK.
Example
Thus, if you receive £50,000 from overseas investments and you do not bring the money into the UK, then you pay no UK tax on that income.
Conclusion
You will enjoy many reliefs related to income, both from the business and those coming from investments. Starting with simple allowances like personal allowance and business expenses to more advanced schemes such as EIS and SEIS, there are ways in which savings in overall tax burden do exist.
These reliefs can make all the difference. The conditions and limits can sometimes be a little complicated, so always take advice from a tax consultant who will enable you to maximize the reliefs available to you within the rules.
