Money Unspun tax-saving tips for self-employed individuals and freelancers

Working for yourself has plenty of perks, but also comes with more than its fair share of challenges.

On a positive note, you get to create a business of your own and steer your career in the direction you choose (to a degree).
But there are challenges, such as the uncertainty of payments and figuring out how much tax to pay. It’s easy to get caught up worrying about over or underpaying, and let’s face it, the penalties for mistakes loom large in the background.

The good news? There are some practical ways to reduce your tax bill and keep everything on track.

Filing a self-assessment each year and paying what you owe is straightforward enough, but finding ways to save on taxes is where things get interesting – and rewarding.

To help ease the stress, we’ve put together this guide to help you:

• Maximise tax deductions and expense claims
• Put aside tax-free money for retirement
• Manage fluctuating income effectively
• Take full advantage of tax reliefs and allowances
• Keep everything organised and easy to track

WHAT ARE THE DIFFERENT TYPES OF SELF-EMPLOYMENT IN THE UK?
Before looking at tax-saving strategies, let’s clarify what we mean by “self-employed.” Self-employment in the UK takes several forms, each with unique responsibilities and tax rules. Here’s a quick overview of the main types and how they differ in terms of taxation.

Sole Trader
Runs their own business, paying tax and National Insurance through Self-Assessment. Offers simplicity and control but comes with unlimited liability.

Partnership
Owned by two or more people, sharing profits and responsibilities. Taxed through Self-Assessment, but liability and disputes can arise unless it’s an LLP (Limited Liability Partnership).

Limited Company
A separate legal entity paying corporation tax on profits, with directors taxed on salaries and dividends. Offers limited liability and tax efficiency but requires more paperwork and fees.

Freelancer / Contractor
Works on projects as a sole trader, through a limited company, or an umbrella company. Enjoys flexibility but faces inconsistent income and possible IR35 complexities.

Umbrella Company
Employs contractors, handling tax through PAYE. Simplifies tax and provides benefits but charges fees and limits control.

Franchisee
Runs a business under the name of an established brand, paying fees and sharing profits. Benefits from a proven model but has less autonomy and faces contractual restrictions.

Gig Worker
Takes on short-term jobs via platforms like Uber, paying tax through Self-Assessment. Offers flexibility but lacks job security and steady income.

BASIC TAX DETAILS
Everyone gets a tax-free allowance of £12,570. That means you don’t pay any tax on earnings up to that point. But if you’re making more than £100,000 you start losing £1 of that allowance for every £2 you earn. So, if you’re bringing in £110,000 a year, your tax-free chunk shrinks to £7,500.

If you’re freelancing and employed, HMRC will apply your personal allowance to whichever they see as your main job. But all your combined income counts towards determining which tax band you’re in. Here’s a quick breakdown for England, Wales, and Northern Ireland at the time of writing (November 2024).

• Basic rate: 20% on income between £12,570 and £50,270.
• Higher rate: 40% on income from £50,271 to £125,140.
• Additional rate: 45% on anything over £125,141.

Scotland has extra bands, but for most of us, those three cover it.

One thing to note – the personal allowance and higher rate thresholds are frozen until 2028. This means that there is potential for inflation to bump wages up, nudging more people into higher tax bands. If your combined income from all employment pushes you into the higher rate, you’ll pay 40% on the chunk that falls into that range.

For national insurance contributions (NIC), there are two classes for self-employed people.

• Class 2 NICs (the flat rate for small profits) have been abolished for those earning over £12,570. This saves you around £192 a year. If you’re earning less, you’ll still need to voluntarily pay Class 2 to maintain state pension eligibility.
• Class 4 NICs, which are based on your profits, currently stand at 6%.

MAKING THE MOST OF TAX RELIEFS AND ALLOWANCES
Tax reliefs and allowances help you save money on your tax bill.

Tax-free allowances include the Personal Allowance (£12,570), Trading Allowance (up to £1,000 for small side gigs), and Property Income Allowance (another £1,000 for rental income). You won’t pay a penny of tax on those amounts, if eligible.

If your business takes a loss, you can use “Loss Relief” to offset other income and reduce your tax bill, either for the current year or previous years.

If you, your spouse or civil partner don’t use your full Personal Allowance, you can transfer up to £1,260 to the other through the Marriage Allowance, saving up to £252 a year. Finally, if you’ve bought something big for your business, like a van or equipment, you can claim tax relief on it through Capital Allowances, which reduces your taxable profit.

For businesses in retail, hospitality, or leisure, a 40% relief on business rates will apply for eligible properties in 2025/26, capped at £110,000 per business.

KNOW YOUR EXPENSES & WHAT YOU CAN CLAIM

Home Office Deductions
If you’re self-employed and work from home in the UK, the simplified expenses system lets you claim a flat rate for business use of your home. This saves you the hassle of calculating what portion of your bills, like electricity or heating, is for work, and removes the need for detailed record-keeping.

The flat rate is based on how many hours you work from home each month.

• 25 to 50 hours: £10
• 51 to 100 hours: £18
• Over 101 hours: £26

Let’s say you worked 55 hours from home over 8 months and 110 hours during 4 particularly busy months.
8 months x £18 = £144
4 months x £26 = £104
Total you can claim = £248

Keep in mind that the flat rate doesn’t include things like phone or internet bills, so if you use your broadband for work, you’ll need to calculate the business portion of that separately.

Now, this system is great for simplicity, but it’s not always the most tax-efficient option.

If you’ve got high household costs and use a lot of your home for business, it might work out better to claim actual costs. You can use this checker tool to compare which method works best for you.

TRAVEL AND VEHICLE COSTS
What You Can Claim

1. Vehicle Costs – Includes insurance, fuel, servicing, repairs, parking, hire charges, breakdown cover, and vehicle licence fees.
2. Travel Expenses – You can claim for business-related train, bus, air, and taxi fares. You can also include hotel stays and meals for overnight business trips.
3. Mileage – If you prefer simplicity, there’s the flat-rate mileage option (simplified expenses) for cars, vans, or motorcycles, which avoids calculating every individual cost, more on that in a moment.

What You Can’t Claim

• Non-Business Use – Personal driving, such as commuting between home and work, isn’t allowed.
• Fines – Parking tickets or speeding fines are strictly off-limits.

Buying a Vehicle:

• If you use traditional accounting, you can claim the cost of cars, vans, or motorcycles bought for business as a capital allowance.
• If you use cash basis accounting, you can claim cars as a capital allowance only if you’re not using simplified expenses. For other vehicles, just claim them as regular business expenses.

Simplified expenses for vehicles is a handy way to cut down on paperwork if you’re self-employed and use your car, van, or motorcycle for business purposes.

Instead of calculating actual fuel, insurance, repairs, and servicing costs, you use a flat rate based on the number of business miles you’ve driven. It’s straightforward and saves a lot of time. Below you’ll find the different rates (as of November 2024).

• Cars and goods vehicles: 45p per mile for the first 10,000 miles, then 25p per mile after that.
• Motorcycles: 24p per mile for all business miles.

Let’s say you’ve driven your car for 12,000 business miles this year. You would be able to claim the following amount.

• First 10,000 miles: 10,000 x 45p = £4,500
• Remaining 2,000 miles: 2,000 x 25p = £500
• Total claimable amount = £5,000

Once you choose simplified expenses for a vehicle, you have to stick with it for as long as you use that vehicle for your business.

You cannot use simplified expenses if you’ve already claimed capital allowances or included the vehicle as an expense in your profit calculation.

You can still claim additional travel expenses, like train tickets and parking fees, on top of your vehicle mileage.

OFFICE SUPPLIES AND EQUIPMENT
If you’re self-employed, you can claim tax-deductible expenses for the tools and supplies you use to run your business.

Day-to-day items (used for less than two years) like stationery, printer ink, and software subscriptions (paid on a recurring basis) count as allowable expenses. Bigger purchases like laptops, printers, or software bought outright are claimed as capital allowances, especially if you’re using traditional accounting.

You can’t claim for anything that’s used for personal use, so if your laptop doubles as a screen to watch Netflix, only the business portion is eligible.

PROFESSIONAL FEES & OTHER DEDUCTIONS
If you’re self-employed, professional fees like accountant services, bookkeeping software, and memberships to trade associations are tax-deductible. These are essential costs that help you manage and grow your business, so they’re fair game when filing expenses.

You can also claim deductions for training courses that help improve your skills in your current trade. Advertising and marketing costs, like social media ads or creating a website, are fully deductible as well.

Client entertainment is a bit more complicated. Things like meals, drinks, or gifts generally aren’t claimable unless they serve a clear business purpose, such as branded promotional items.

If applicable, don’t forget to use the Annual Investment Allowance, which lets you claim 100% tax relief on qualifying plant and machinery purchases, up to £1 million. If you’re considering going green, first-year allowances for zero-emission cars and electric vehicle charge points have been extended to 2026.

The key thing with tax deductibles is to make sure you keep everything business-related and save your receipts (physically or digitally), just in case.

SAVING FOR RETIREMENT TAX-FREE OPTIONS
Tax-free pension options let you stretch your savings further since they’re not reduced by income tax. Plus, with government bonuses or tax relief, it’s like getting a boost to help grow your nest egg faster.

Below you’ll find the three main tax-free options that are available to self-employed people.

• Self-Invested Personal Pensions (SIPPs): Every contribution you make reduces the amount of income that gets taxed and the government tops it up with tax relief. For example, if you put in £800, it gets bumped up to £1,000, which is “free money” towards your retirement.
• Lifetime ISAs (LISAs): If you’re under 40, you can open one of these and save up to £4,000 a year until you’re 50. The best part? The government adds a 25% bonus to your contributions, which is tax-free when you use it for retirement or your first home.
• National Insurance Credits: These are often overlooked but highly important. If you’re not earning enough to pay NI, make sure you’ve got enough credits to cover gaps in your contributions. This helps you stay eligible for the full state pension later on.

ADVANCED TAX-SAVING STRATEGIES
Hiring an Accountant or Financial Advisor
Finding a trusted partner helps if taxes stress you out or you’re unsure of the best ways to save. An accountant can spot deductions or reliefs you might miss and a financial advisor helps you make long-term plans, like retirement or investments, in the most tax-efficient way.

Incorporating as a Limited Company
If your earnings are rising, switching to a limited company can save you a lot of money. You pay corporation tax, which is often lower than income tax rates, and you can take money out as dividends, which are taxed less. It’s a bit more paperwork, but the savings can be worth it.

Deferring Income
If you know you’ll earn less next year, you can delay invoicing until the new tax year to avoid paying a higher rate this year. Spreading your income strategically like this can save you money in the long-term.

Splitting Income
If your spouse pays less tax, you can legally share income, such as dividends from a company you both own, to bring down your overall tax bill. Just make sure everything’s above board to avoid any issues.

Property Investments
If you’re investing in second homes or buy-to-let properties, prepare for higher Stamp Duty Land Tax rates, now 5% from October 2024. For properties worth over £500,000, the single rate for companies rises from 15% to 17%, adding to costs.

Common Pitfalls to Avoid
It’s easy to let things slip, but a missed date or a simple mistake can cost you dearly.

Key Tax Deadlines
The main ones to remember are as follows.

• 31 January: This is the deadline to file your self-assessment tax return for the previous tax year and pay any tax you owe.
• 31 July: If you’re making payments on account, the second instalment is due here.

Mark these in your calendar or set reminders – you don’t want to deal with late penalties.

Avoiding Penalties
Penalties kick in for late filing, late payments, or inaccurate returns. For example, file a day late, and you’ll face a £100 fine right away. Miss by three months, and it gets worse. The best way to avoid this? File early, even if you don’t have the money to pay straight away. You can usually set up a payment plan with HMRC to spread payments over a year or more.

Keep an eye on VAT thresholds and new property tax rules that were announced in the 2024 autumn budget. The VAT registration threshold is frozen at £90,000, so if your income edges close, prepare to register. For property investors, Stamp Duty Land Tax on second homes and buy-to-let properties jumps to 5% from October 2024, increasing upfront costs.

RECORD KEEPING: TOOLS AND TIPS
As well as ticking boxes for HMRC, keeping good records makes your life easier and helps to avoid nasty surprises during tax season.

Why Records Matter
Complete and clear records are your best defence if HMRC ever decides to audit you. They back up your claims and make sure you’re not over or under-reporting anything. Accurate records also mean you’re less likely to miss out on deductions or allowances you’re entitled to.

Tools and Apps
There’s no shortage of tech tools and apps to help you keep everything in order these days.

• QuickBooks and FreeAgent are great for tracking income, expenses, and invoices.
• If you want something simple, a good spreadsheet template can do the trick.
• Apps like Receipt Bank or Expensify let you snap pictures of receipts to stop you drowning in paperwork.

Organising Receipts
Gone are the days of shoving receipts into a shoebox! Scan and tag them right away with the date, category, and amount. Most apps let you sync this with your accounting software, so you can easily find everything in one place.

Staying Ahead
Don’t leave everything until January. Set aside time each month to update your records, file receipts, and check your income versus expenses. It’ll save you hours of stress when tax season rolls around. Also, keeping an eye on your numbers year-round helps you spot trends, like rising costs, so you can act before it’s too late.

Managing Income Variability
When you’re self-employed, it’s a good idea to set aside income for taxes each month. You can also use tax-efficient savings accounts to prepare for end-of-year bills or as backup funds for off seasons. Keep a close eye on your finances and pay excess money into reserves during high-income months.

TAKE CONTROL OF YOUR SELF-EMPLOYED FINANCES
Working for yourself comes with plenty of opportunities, but it also brings the headache of dealing with taxes.
The key things to stay on top of are deadlines, record keeping, and taking full advantage of tax reliefs, allowances, and deductions.

This will help reduce your tax bill and take better control of your finances.

If you want to set up strategies that lead to a more secure financial future, contact us today for tax-saving advice that fits your unique circumstances.