Decreasing tax

FredJ

I would like to drop into a lower tax bracket and want to improve my disposable income. I am self-employed. If I pay more into a pension and pay into an ISA, will this help? 

Pennywise

Making pension contributions can reduce your taxable income into a lower tax band, i.e. higher rate down to basic rate, but it doesn't increase your disposable income as you pay more into the pension than you save in tax.

Paying into an ISA won't reduce your tax on your s/e income at all as it's interest and capital gains from the ISA which are tax free, so again, paying money into an ISA won't increase your disposable income.

FredJ

Thank you. Is it financially viable to pay myself more and use this to pay off a loan?

Tucosalamanca

It might be worth starting a limited company, rather than being self employed.
Taking income as dividends/some costs being tax deductible and so on...
Sitting down with an accountant for an hour could be money well spent (educational if nothing else)

Grumpy_chap

FredJ said:

I would like to drop into a lower tax bracket and want to improve my disposable income. I am self-employed. If I pay more into a pension and pay into an ISA, will this help? 

Are you self employed sole-trader or Ltd Co?  The latter gives more flexible options on the timing of personal income.  There are many variables, so overall tax and disposable income may be higher or lower as Ltd Co than sole-trader.

At a personal taxation level, most steps to reduce income tax liability will also result in lower disposable income.

A review with an Accountant may well be beneficial to assess your options.

I am not sure that I understand the second query, though reducing debt is generally a good thing.  Drawing more from the business to do this may result in more tax in the short term.

FredJ said:

Thank you. Is it financially viable to pay myself more and use this to pay off a loan?

FredJ

I have a £3000 loan paying £175 per month. If I pay myself an extra £3000 and use this to pay off the loan today, is that worth doing? The extra £3000 will not put me in a higher tax bracket as I already earn over £40000?

MattMattMattUK

Just checking as things appear a certain way from your posts, are you under the impression that when you reach a new tax bracket that is charged on all of your income, not just on the amount over each threshold? 

FredJ

I am already in the higher tax bracket and want to know whether it would be best if I paid myself an extra 3k to pay off a loan now or simply to keep paying the 175 per month until the loan expires. If I pay it off now I assume that would free up the 175 per month.

Grumpy_chap

Do you operate as sole-trader or Ltd Co?

FredJ said:

The extra £3000 will not put me in a higher tax bracket as I already earn over £40000?

Which tax bracket do you refer to?
For most people, the personal allowance is £12.5k and you don't pay higher rate tax until earnings exceed £50,270.

FredJ

I am in the higher tax bracket and am a sole trader. Would it be beneficial to pay off the loan and what would the benefits be of becoming a limited company?

Grumpy_chap

Paying off the loan will make no difference from a tax perspective (or vice versa). 

IMO, it rarely makes sense to carry credit that can be cleared, so pay off the loan.

Speak to an Accountant to make the decision between sole-trader or Ltd Co. and to make best tax efficient decisions.  For example, higher pension contributions will reduce tax liability.  Higher pension contributions will also reduce disposable income in the short term.

Some differences between sole-trader or Ltd Co are mentioned higher up thread.