Being self-employed can be extremely rewarding, but it can also be extremely costly.
Understanding the value of small businesses, countries worldwide offer a range of tax credits and deductions to help with operating costs. While most governments support the self-employed, some do it better than others.
So who does it better? You be the judge.
Table of Contents
01 – United Kingdom
The UK has several tax breaks for self-employed individuals, with additional income support available during the COVID-19 pandemic.
Working tax credit
The Working Tax Credit is a government payment based on your earnings and working hours. The purpose of the WTC is to help with day-to-day costs for lower-income households. While there is no income limit for WTC eligibility, taxpayers’ amount reduces for every dollar earned over the WTC threshold.
- 25-59: 30 hours minimum p/w
- 60+: 16 hours minimum p/w
- Disabled: 16 hours minimum p/w
- Single with child/children: 16-hours minimum p/w
- Couple with child/children: 24-hours shared minimum with one person working at least 16 hours p/w
Self-employed taxpayers must aim to make a profit in a commercial, regular, and organised environment to qualify for the WTC.
The Universal Credit is a monthly payment to assist with the cost of living in the UK. Self-employed taxpayers can use Universal Credit for growing their businesses.
To qualify for the extra support, self-employed taxpayers must prove:
- Self-employment is their primary source of income.
- They work regularly.
- They work in an organised environment with sound recordkeeping practices.
- They make a profit or expect to make a profit.
The Personal Allowance is a tax-free threshold for all UK residents. The basic Personal Allowance is £12,570. This is the income individuals are entitled to earn before paying income tax each year. If you earn over £100,000, your Personal Allowance will decrease by £1 for every £2 earned over £100,000. Therefore, individuals with earnings over £125,140 won’t receive any Personal Allowance that year.
Self-employed taxpayers are expected to take the Personal Allowance off their profit earnings before working out their income tax to pay.
One of the best ways to reduce your tax bill is by claiming allowable expenses. Allowable expenses are removed from annual turnover. The remaining amount is your taxable profit. For self-employed individuals, allowable expenses include:
- Office costs – stationery, utility bills and rent.
- Clothing costs for staff uniforms.
- Insurance and bank fee charges.
- Advertising, website development and marketing costs.
- Travel costs – car lease payments, fuel, public transport fees.
- Training and refresher course fees.
COVID-19 support: Self-Employment Income Support Scheme
If you’re self-employed and the pandemic has impacted your profits, you may be eligible for a support grant. You must have actively traded in the years 2019-2020 and 2020-2021, acquired profits of no more than £50,000 and met your tax return deadline.
If your profit is down 30% or more, you could be entitled to up to £7,500.
If it’s down less than 30%, you could be entitled to up to £2,850.
02 – United States
The US helps alleviate the costs of running your own business through a series of benefits and deductions.
Earned Income Tax Credit
The EITC supports low to moderate-income earners. For self-employed individuals, your earned income is your total income fewer expenses. You must claim your expenses in full before applying for the EITC. The EITC was raised in 2021, with those eligible able to receive between $1,502 and $6,728 depending on tax-filing status, income, and dependents.
Child Tax Credit
Self-employed taxpayers in the US are eligible to claim a tax credit for each child in their care. The Child Tax Credit is assessed using the age of the children and the income of the parents or guardians. The credit increased significantly in 2021 as part of the American Rescue Plan during the COVID-19 pandemic.
- Credit for children under six: $3,600
- Credit for children aged 6-17: $3,000
The earning threshold for the Child Tax Credit is $75,000 for singles and $150,000 for joint filers.
The credit begins to reduce for every dollar earned above these incomes.
The IRS seems to be stricter about recordkeeping when it comes to claiming business expenses. If you’re in the US, be sure to maintain excellent recordkeeping practices to avoid being audited and penalised.
Some self-employed individuals in the US choose to prepare a diagram of their office space with accurate measurements, to substantiate deductions in the event of an audit.
- Annual electricity costs – The percentage of space your office occupies within your home is the percentage tax-deductible from your annual electricity bill.
- Office space expenses.
- Charitable donations.
- Home depreciation and repair costs for homeowners.
- Homeowners insurance.
- Health insurance premiums.
- Childcare costs.
- Meals are 50% tax-deductible when travelling for business.
- Travel costs – the total cost of travel to and from your business destination is 100% tax-deductible.
- Business vehicle cost – car lease payments and fuel costs.
03 – New Zealand
The self-employed in New Zealand jump through a few more hoops to optimise their tax position. While there are tax credits available, they’re not aimed explicitly at self-employed taxpayers but rather at New Zealanders as a whole. However, in light of COVID-19, the New Zealand government has introduced some tax relief options to business owners.
Independent Earner Tax Credit
The IETC is eligible for income earners of all types, including the self-employed. To qualify, you must be a New Zealand resident and earn between $24,000 and $48,000 gross income. This credit is designed to help with the cost of living for low to moderate-income earners.
Individuals who earn $24,000 to $44,000 are eligible for $10 per week.
The amount reduces by 13 cents for every dollar earned above $44,000 and capped at $48,000.
For self-employed individuals, the full tax credit is paid at the end of the income year.
COVID-19 relief: Loss carry-back scheme
Self-employed individuals expecting to make a loss in 2021 can use that loss to offset profits in the year before. This means they can place the loss in the preceding income year when profits were higher.
To be eligible for the loss carry-back scheme, taxpayers must:
- Have made a profit in the previous income year.
- Incurred a loss in the current income year.
The New Zealand government offers a long list of tax-deductible expenses for self-employed taxpayers. These include:
- Rent on business premises
- Insurance premiums
- Depreciation on office goods – computers, furniture and equipment.
- Business vehicle costs – fuel, maintenance and lease payments
- Utility expenses
- Business phone expenses
- Work uniforms
- Tax agent fees
- Charitable donations – taxpayers can claim 33.33 cents for every dollar donated to approved charitable organisations.
Simplified tax systems for business owners
New Zealand boasts a complicated business tax system that leaves self-employed taxpayers penalised for underpaying or overpaying tax. With few lucrative tax breaks outside expense claims, self-employed New Zealanders find it more effective to optimise their tax position than relying on government credits. Intermediaries like Tax Traders have aided businesses across the country with their tax pooling system, which prevents tax penalties and simplifies tax for the self-employed.