Being self-employed in the UK offers plenty of perks to individuals, including flexibility of schedule, financial independence, and autonomy in decision-making. However, it also entails many challenges and tax responsibilities, which, if not handled correctly, can send your self-employed success down the drain. This guide will provide you with effective and implementable strategies to know how to save taxes as self-employed workers in the UK while remaining compliant with HMRC regulations.
Moreover, it is often observed that a considerable number of individuals kick off their self-employed careers without fully understanding or knowing about taxation and how to manage their finances effectively.
Consequently, as a solo player, you must comprehend how to save taxes as self-employed by grasping the nettle of the best and most practical strategies.
How to save taxes as self-employed workers?
We are going to list the various tax-efficient methods by utilising which you can not only reduce your current tax liabilities but also steer towards greater financial security in the future. Thus, without any further delay, let’s explore the practical steps that can result in potential tax savings.
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Understand your tax obligations:
Before anything else, it is necessary for all self-employed individuals to register with HMRC and file a Self-Assessment Tax Return annually to fulfill their tax obligations. By becoming registered, you ensure that the tax payments are accurate and up to date.
Understand your tax bill:
First and foremost, it is paramount that you come to grips with all the components of your tax bill. The question that arises here is what a tax bill is. Notably, the rate at which your income is taxed, The NICs, and the allowances you are entitled to claim are the primary elements determining your tax bill.
To begin with, the tax you pay on your income is called the income tax. The income in question can come from your salaries, investments, or business profits.
Furthermore, your income is taxed at different rates depending on which tax band it is falling under. Fortunately, there is a key allowance called the personal allowance, which is the amount of income you can earn before you will have to pay income tax.
Subsequently, this personal allowance is tax-exempt. For the current tax year (which runs from 6 April 2024 to 5 April 2025), the personal allowance is £12,570.
Above that allowance, your income would be taxed at the following rates based on the figure:
| Tax Band | Tax Rate (%) | Taxable Income |
| Personal Allowance | 0 | Up to £12,570 |
| Basic Rate | 20 | £12,571 to £50,270 |
| Higher Rate | 40 | £50,271 to £125,140 |
| Additional Rate | 45 | over £125,140 |
You should stay abreast of any changes made in the tax rates as the new tax year kicks off. Therefore, keep visiting the government website for the updated figure:
Likewise, once you become self-employed, you are obligated to pay National Insurance Contributions (NICs).
According to HMRC, Class 2 contributions are considered paid in order to protect your National Insurance record. Consequently, you do not have to pay Class 2 contributions.
However, if your profits exceed £12,570 a year, you must pay Class 4 contributions.
Notably, for tax year 2024/25, you will need to pay:
- 6% on profits from £12,570 to £50,270
- 2% on profits over £50,270.
For further information on NICs for self-employed, visit the government website.
Overall, staying informed of these tax and NICs rates can help you benefit from the tax-free allowances and identify savings, potentially decreasing your tax burden.
Claim all allowable business expenses:
Being self-employed means your business entails expenses for running it. If these expenses were also counted in the tax liability, the entire idea of becoming self-employed would surely be a fruitless endeavour.
However, fortunately, HMRC allows self-employed individuals to deduct all the expenses they have incurred exclusively for business purposes. Then, the remaining amount will be the taxable income. It is a significantly advantageous way when learning how to save taxes as self-employed. By deducting all the claimable expenses before tax, you can cut down your tax bill.
The following are the major deductible expenses:
- Office Costs:
Rent, utilities, stationery, and business-related software.
- Travel Expenses:
Fuel, vehicle insurance, maintenance, and business-related travel costs.
- Marketing and Advertising:
Website development, social media ads, and business promotions.
- Professional Fees:
Accountants, legal advisors, and business-related subscriptions.
- Stock and Materials:
Costs of raw materials and goods required for business operations.
- Working from home:
If you are running your business through a work-from-home setup, you can claim a proportion of certain costs related to working from home. For instance, if you’re a sole trader or partner, you can either calculate your work-related expenses or claim a flat rate, which is also known as simplified expenses.
In addition, the HMRC website has a useful list of all the deductible expenses you can claim based on what purpose they serve for your work. Go through this list to ensure you’re claiming all the expenses you are entitled to.
Lastly, it is essential to maintain detailed records of all the claimable expenses to avoid overpayment of tax.
Claim tax relief through Gift Aid:
Claiming tax relief through Gift Aid is another important strategy for learning how to save taxes as self-employed. The Gift Aid scheme allows you to enhance the value of your charitable donations.
To go into detail, when self-employed individuals make donations to registered charities, they can claim back the basic rate tax paid on those contributions. For instance, if you are paying tax above the basic rate (20%), you can claim back up to an additional 25% on charitable contributions under Gift Aid.
Subsequently, for every £1 you have donated, you can reclaim an additional 25 pence from HMRC. Interestingly, the claimable amount does not just depend on cash donations. Instead, you can also secure tax reliefs on gifts of land, property or shares to charity.
Similarly, higher-rate taxpayers can take further advantage by reclaiming additional tax relief through self-assessment tax returns since they pay above the basic rate.
As a result, the Gift Aid is a valuable tool in tax planning, for it effectively increases the total amount that goes to charity and reduces overall taxable income.
Leverage capital gains tax allowances:
By leveraging capital gains tax allowances, a self-employed individual can strategically minimise their tax liabilities.
To clarify, using the annual Capital Gains Tax (CGT) allowance can reduce the tax paid on profits from selling assets. For the 2024/25 tax year, the allowance is £3,000. It signifies that you can make gains of up to £3,000 each year without bearing any tax liability. Furthermore, it becomes especially advantageous if you intend to sell property, shares, or other valuable assets.
Further explaining, It is of immense importance that you track your gains throughout the year and schedule your sales accordingly. It is because when you spread sales across multiple tax years, you can increase your CGT allowances and decrease the payable tax.
Beyond that, in case you are married, both spouses can claim their own CGT allowances. Therefore, you can ensure efficient tax planning through strategic assets transfer.
In brief, utilising the capital gains allowance can not only help in tax efficiency but also encourage smart investment and asset management. As an outcome, self-employed individuals seeking to bolster their financial position can substantially benefit from it.
Contribute to a pension scheme:
For self-employed individuals, it is beneficial to set up a pension for themselves. While it is not mandatory for self-employed people to contribute to a pension scheme, it is a sensible way to save for retirement.
More importantly, contributions to a pension scheme qualify for tax relief. The government provides 20% tax relief on pension contributions, and higher-rate taxpayers can claim additional relief through their tax returns.
Let’s understand it with an example. For an individual who is a basic rate taxpayer, every £80 they put into their pension can be claimed back with an additional £20 by the government, meaning they can get 20% tax relief.
Likewise, for the higher tax rate payers (paying 40%), there will be an additional tax relief to claim.
Ultimately, contributing to a pension scheme is a considerable tax-efficient way for self-employed workers in the UK. With a pension scheme, they can reduce their taxable income while also saving for retirement to secure their future. Hence, a pension is a smart choice for managing both current finances and long-term savings.
Consider incorporating a limited company:
Whether you have lately become self-employed or have been operating as a sole trader for a while, incorporating your business to fully understand how to save taxes as self-employed. To clarify, incorporation means you will have to set up your business as a limited company. By doing so, you can become a shareholder as well as a director of the company.
Now, by being classed as a limited company director, you can reduce your tax liability by withdrawing a part of your earnings as dividends.
Further elaborating, dividends are payments that the limited company distributes among the shareholders from the post-corporation tax profits. It is the portion of the company’s retained profits.
Alternatively, dividends are payments made to shareholders after a limited company has fulfilled its tax liabilities, such as corporation tax and VAT. It is worth emphasising that although dividends are subject to dividend tax and are taxed differently from salaries, the rates are much lower than those of self-employment income tax.
For instance, dividends are subject to lower income tax rates than salary, and there are not any NICs payable on dividends, both for employer and employee.
Now, let’s discuss how withdrawing dividends is a tax-saving method. Notably, for the 2024/25 tax year, you receive a tax-exempt dividend allowance of £500, and it is other than your personal allowance of £12,570.
As a result, you can receive up to £13,070 before paying any income tax at all.
Aside from the tax-free allowance, dividend income is taxed at the following rates depending on your total taxable income:
| Tax Bands | Tax rates on dividends over the allowance (%) | Annual Income |
| Basic Rate | 8.75 | £13,070 to £50,270 |
| Higher Rate | 33.75 | £50,271 to £125,140 |
| Additional Rate | 39.35 | over £125,140 |
For more information about this, you can visit the government website.
All in all, incorporating a limited company is not a breeze. Thus, it is rational to consult your accountant about all the ins and outs of a limited company.
Further, down the line, you can get a grasp on limited company working by reading our following guide:
How to set up a limited company in the UK?
Split income with a spouse or family member:
If your spouse or family member is helping you run the business, you can legally employ them and pay them to reduce taxable profits. However, it must be taken into account that the salary must be:
- Reasonable for the work performed.
- Below the personal allowance threshold of (£12,570) to remain tax-free.
As an outcome, with this method, you can spread your income across tax-free allowances and lower tax bands.
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Bottom line:
In the end, reducing tax liability as a self-employed individual in the UK warrants careful planning and awareness of HMRC tax regulations. Therefore, you must understand how to save taxes as self-employed to maximise your income.
By implementing the most workable strategies suiting your business needs among the ones cited above, you can significantly slash your tax burden. Further down the line, with the help of a professional accountant, the tax saving game becomes a no-brainer.
Accordingly, the accountants listed on Accountingfirms can give you a personalised consultation resonating with your business goals so that your self-employment ambition prospers and flourishes.
Also, if you are inclined to take the plunge and become self-employed, you can learn about self-employment a great deal by giving our following guides a thorough read:
Everything you must know about what is self-employment?
What are advantages and disadvantages of being self-employed?
What are the types of self-employed in the UK?
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.