Tax-saving tips for self-employed individuals and freelancers
Most freelancers and self-employed people assume they’re doing tax “well enough.”
But what if the issue isn’t what you’re doing wrong and instead it’s what you’re not doing at all?
It’s surprising how many self-employed people in the UK misunderstand tax rules and overlook tax relief.
If you want to stop leaving thousands on the table, then carry on reading. We’ll show you how to overcome tax blind spots and effectively increase your annual income with minimal effort and without gaming the system.
IS YOUR BUSINESS STRUCTURE WORKING AGAINST YOU?
In 2024, more than 3 million people in the UK were registered as sole traders. A sole trader is self-employed and running the business as an individual, even if you hire others.
Most choose this route because it’s easy. You simply register with HMRC, track income and expenses, then file a self-assessment each year. Job done. But there’s a catch. As a sole trader, all your profits are taxed as personal income, so once you earn over £50k, you hit higher tax rates.
In some cases, switching to a limited company can save you money. As an LTD, the company pays 25% corporation tax, and you pay yourself through salary and dividends, which are often taxed more lightly. When done right, this can lower your overall tax bill, especially as your income grows.
There’s no exact point to switch, but many advisors suggest reviewing it once you earn around £40k. If you’re taking in more than £50k, you can potentially save tens of thousands over the mid-term, say three to five years.
As a limited company, you also get added protection. As a sole trader, you and your business are legally the same, so if things go wrong, your personal assets are at risk. A limited company separates you from the business, creating a legal buffer.
DRAWBACKS OF SWITCHING TO A LIMITED COMPANY
Going limited means more admin, such as filing annual accounts and running payroll as a director. You also take on legal duties, as you’re running a company now, not just yourself.
That said, many freelancers overestimate how hard it is. With good software or an accountant, it’s mostly a hands-off thing. Often, it’s the fear of complexity rather than the reality that stops people.
WHAT IR35 MEANS — EVEN IF YOU’RE NOT A CONTRACTOR
Many think IR35 only applies to contractors or agency workers, but that’s not quite true. It targets freelancers who, in practice, work like employees with the same hours, same role, and same oversight.
Even if you’re not a contractor, you could still fall under IR35 if a medium or large client sees your role as more “employed” than freelance.
Once you come under the banner of IR35, you lose the key tax perks of having a limited company. Your client must deduct PAYE and National Insurance before paying you, so it ends up being like a job, but without the benefits.
It’s tricky to judge alone, which is where IR35 contract reviews help. Many larger businesses now do their own checks too. If you work project-to-project, set your own hours, and bring your own tools, you’re likely outside IR35, but it’s worth confirming with an expert so you don’t lose out when it comes to tax payment time.
DON’T GET CAUGHT OUT WITH EXPENSES
HMRC only allows expenses that are “wholly and exclusively” for business, which sounds simple, but in practice few things are 100% business-use.
Take your phone. You might email clients on it, but you also text friends and scroll the web. This makes it “mixed-use” and you can’t claim the full bill, only the business share. It doesn’t mean you have to track every minute you use your phone. HMRC accepts reasonable estimates. For example, if you estimate that slightly more than half of your phone use is for work, then simply claim 60%. Just be ready to back it up with usage stats if needed.
THE CAPITAL ALLOWANCE BLIND SPOT
Expenses cover everyday costs like phone bills, web hosting, travel, and stationery.
Capital allowances are for bigger buys that last over a year, such as laptops, tools, office chairs, or vehicles.
Many people mistakenly treat these as regular expenses, but they belong in a separate category. HMRC makes life a bit easier by letting you claim the full cost in year one using something called Annual Investment Allowance. Put it in the wrong spot on your tax return though, and it could get flagged or missed, so be careful.
CLAIMING MIXED-USE EXPENSES
If you work from home, at least some of the time, you can claim part of your household costs, but only the portion used for business.
Let’s say you use one of five rooms as an office for 8 hours a day. You’d work out a fair percentage based on space and time, then apply it to things like rent, electricity, and broadband.
HMRC also offers a simple flat-rate option based on hours worked from home. It’s not always the biggest claim, but it’s safe and easy. Same goes for cars, as you can log actual costs or just use the 45p-per-mile rate.
Below, you’ll find a list of the pros and cons of either claiming the flat-rate option or actual costs.
🚗CAR EXPENSES
| Method | Pros | Cons |
| Flat Rate (e.g. 45p/mile) | ✅ Super simple – no need to track fuel, insurance, repairs
✅ HMRC-approved, no risk of overclaiming ✅ Great for low to moderate mileage |
❌ Might underclaim if you drive a lot
❌ Can’t switch to actual costs for the same car later |
| Actual Costs | ✅ Can work out better if your car costs a lot to run
✅ Useful for high mileage or expensive cars |
❌ More admin – must track receipts, insurance, fuel, MOT, repairs etc
❌ Only claim the business % use, not the full amount |
🏠 HOME OFFICE
| Method | Pros | Cons |
| Flat Rate (simplified) | ✅ Easy – just use HMRC’s set weekly rate based on hours worked
✅ No need to calculate bills or usage |
❌ Lower claim – not tailored to actual usage
❌ Can miss out on full deductions if your home costs are high |
| Actual Costs (apportioned) | ✅ More accurate and potentially higher deduction
✅ Reflects your real use of space, time, and utilities |
❌ More complex – need to apportion % use of rent, bills, broadband
❌ Need to keep utility bills and justify business % use |
Don’t be tempted to take risks when it comes to claiming expenses, as it can land you in hot water with HMRC if you get it wrong.
Aim to keep everything clear and simple by saving receipts, tracking business and personal spending separately (ideally with different bank accounts), and when in doubt, ask yourself: “Would I be spending this if I didn’t have a business?” If not, it’s likely to be deductible. If yes, claim only the business portion, or not at all.
THE £1,000 TRADING ALLOWANCE RULE
The trading allowance lets you earn up to £1,000 from self-employment in a tax year without registering or filing with HMRC. It’s perfect for small side gigs or testing the waters.
If you earn under £1,000 in a year, you’re in the clear. If you go over £1,000, you have two choices: deduct £1,000 using the allowance or claim actual expenses. You can’t do both though, so pick whichever one saves you the most.
For instance, if you earn £5,000 and spend £2,800 on gear and travel, then claiming expenses will net you an extra £1,800 in deductions compared to the flat allowance. It’s always worth doing the maths before you decide.
TAX PLANNING FOR IRREGULAR INCOME
When you’re self-employed, HMRC doesn’t wait for the year to end. They expect advance payments called “payments on account,” which are due in January and July and based on last year’s income.
It’s not usually a problem if your income is steady, but it can be painful if you’re earning less this year or your income fluctuates a lot. You can ask to reduce payments via form SA303 or your HMRC account, but be careful not to go too low or you’ll face interest on the shortfall.
The best thing to do is update a rolling tax estimate every few months. It’ll keep your payments accurate and avoid nasty surprises.
WHY “JUST SAVE 30%” DOESN’T ALWAYS WORK
Many freelancers follow the “save 30%” rule, but it’s not always the best option. If you earn under the personal allowance (£12,570), you might only owe 10 to 15%. But if you earn over £50K, then 30% might not cover it.
A better approach is tiered savings:
- Under £12,570: Save 10 to 15%
- £25K–£50K: Save 25 to 30%
- Over £50K: Save up to 35%
To handle income swings, calculate your rolling average, which is the total income from the last 3 to 6 months divided by the number of months, then base your savings on that. For example, if your average monthly income over 6 months is £2,500, setting aside £750 (30%) each month builds a buffer that evens out the highs and lows.
Tools like QuickBooks or Coconut can also help by estimating your tax in real-time and auto-tagging expenses, so you’re not guessing when the tax bill lands.
TAKE ADVANTAGE OF TAX RELIEF
When people think of “relief” in relation to taxes, it’s usually just the relief that you get when you hit “submit” on your tax return!
In all seriousness though, it’s worth trying to understand the various forms of tax relief and how to claim them.
MARRIAGE ALLOWANCE
If one partner earns under the personal allowance (£12,570) and the other is a basic-rate taxpayer, you can transfer up to £1,260 of unused allowance. That’s a tax saving of around £252 a year.
It’s often missed because it sounds like a faff, but it takes only a few clicks to apply and you can backdate it up to four years for a potential £1,000+ refund.
PENSION TAX RELIEF
Pension contributions reduce your taxable income. If you earn £50,000 and pay £5,000 into your pension, you’re only taxed on £45,000 of it.
The government also adds 20% tax relief for basic-rate taxpayers, which means your £5,000 contribution only “costs” you £4,000. Higher-rate taxpayers save even more.
RENT-A-ROOM SCHEME
Rent out a furnished room in your home (even via Airbnb) and you can earn up to £7,500 a year tax-free. There’s no need to track expenses or do complex maths. Simply tick a box and enter the total on your tax return.
GIFT AID
Gift Aid lets UK charities claim 25p for every £1 you donate — at no extra cost to you. If you’re a higher-rate taxpayer, you can also reclaim the difference.
- Basic-rate (20%): No personal relief, but the charity still gets a 25% boost
- Higher-rate (40%): Claim back 20% of your donation
- Additional-rate (45%): Reclaim 25%
It’s a simple way to give more and get more back if you pay higher-rate tax.
WHEN VAT ACTUALLY WORKS IN YOUR FAVOUR
VAT usually applies to businesses earning over £85,000, but even if you’re under that, registering can still be worth it.
If most of your clients are VAT-registered (like agencies or corporations), they don’t mind you adding 20% to your invoice, as they’ll reclaim it. Meanwhile, you can reclaim VAT on your own costs, like software, gear, and accountant fees.
For example, if you spend £5,000 a year with £1,000 VAT included, you could get £1,000 back.
You should consider registering for VAT if:
- Your clients are VAT-registered
- You have VAT-heavy expenses
- You expect to pass £85k soon and want to claim early
Yes, it’s more admin, but it could save you money.
USE SOFTWARE FOR AUTOMATION AND SPOTTING COSTLY MISTAKES
Accounting software isn’t just for tracking and filing taxes. It works year-round to flag issues and give you real-time tax estimates.
Say you buy a laptop or travel for work but forget to log it as an expense, that’s a missed deduction. Good software will flag it up right away when you scan the receipt.
You can also tag mixed-use costs, like 30% of your energy bill, and the software keeps everything consistent, helping you claim the right amount and avoid errors.
TAKE STRATEGIC CONTROL OF YOUR TAX BILL
For freelancers, doing your taxes “well enough” might seem fine, until you realise how much money you’re losing to missed claims and unused reliefs.
Don’t worry, you don’t need to become a tax expert. But you should take the time to choose the right structure, use software to catch mistakes, claim reliefs, and know when VAT works in your favour.
When you work for yourself, every pound saved is a pound earned, and that can be the difference between scraping by and building something sustainable.
If you’re not sure how to save money on your tax bill, that’s a sign to get support. Speak to a qualified advisor today who understands self-employment taxation
