How to pay less tax when you're self-employed (legally)

Nobody wants to hand HMRC more than they owe. The good news is that most self-employed people in the UK overpay simply because they don’t claim what they’re entitled to. This is all legitimate, above-board stuff, not dodgy loopholes. A quick note first: I’m not a tax adviser, and your situation is your own, so treat this as a starting point and check anything specific with an accountant.

Claim every allowable expense

You only pay tax on your profit, which is your income minus your allowable business costs. Every legitimate cost you forget to claim is tax you pay for no reason.

Common ones people miss:

• Software subscriptions and tools you use for work
• Website, hosting and domain costs
• Accountancy and bookkeeping fees
• Bank charges and payment processing fees
• Business insurance
• Stock, materials and postage
• Training directly related to your existing trade

The rule of thumb is the cost has to be “wholly and exclusively” for your business. A laptop you only use for work counts. Your weekly food shop doesn’t.

The home office

If you work from home, you can claim a share of your household running costs. There are two ways.

The simplified flat rate is the easy option. HMRC lets you claim a set monthly amount based on how many hours a month you work from home. No receipts, no maths on your gas bill.

The actual-cost method takes more effort but can be worth more. You work out the business proportion of your rent or mortgage interest, heating, electricity, council tax and broadband, usually split by the number of rooms and the time you use them for work.

If you’re at home full time, the actual-cost method often wins. If it’s a few hours here and there, the flat rate saves you the hassle.

Mileage and travel

If you use your own car for business journeys, you can claim mileage at HMRC’s approved rate. For cars it’s 45p a mile for the first 10,000 business miles in the year, then 25p after that. That covers fuel, wear and tear, insurance, the lot.

Business travel doesn’t include your normal commute, but it does include trips to clients, suppliers, or a job site. Keep a simple log of the date, where you went and the miles. Train fares and parking for business trips are claimable too.

The trading allowance

If your self-employed income is small, the £1,000 trading allowance is your friend. Earn under £1,000 from self-employment in a tax year and you may not need to report it at all.

Earn more, and you can choose to deduct the £1,000 allowance instead of your actual expenses. If your real costs are less than £1,000, take the allowance. If they’re more, claim the actual costs. You pick whichever leaves you better off.

Pension contributions

Paying into a personal pension is one of the most effective legal ways to lower your tax bill while keeping the money, because it’s still yours, just locked away for later.

Contributions attract tax relief at your rate, so a basic-rate taxpayer effectively gets a top-up, and higher-rate taxpayers can claim more back through their Self Assessment. It reduces the sting of your bill and builds something for the future, which self-employed people badly need since there’s no workplace pension doing it for you.

Sole trader or limited company?

At a certain profit level, running as a limited company can save tax, because you can take a mix of salary and dividends rather than paying Income Tax and National Insurance on the whole lot.

But a company brings more admin, more filing, accountancy costs and less privacy. There’s no single magic number, but many people start looking at it once profits are comfortably into the tens of thousands. It’s exactly the kind of decision worth paying an accountant to model for your numbers, because the answer depends on how much you take out versus leave in.

Keep proper records

None of the above works if your records are a mess. When your bookkeeping is scattered across bank apps, screenshots and memory, you miss expenses and you overpay.

Log income and costs as they happen, keep the receipts, and put money aside for the bill each month so January isn’t a shock. Keeping it in one private place is far easier than a shoebox, and it’s part of what is built to do for solo founders. HMRC expects you to keep records for several years, so a tidy system now saves real pain later.

Pay what you owe, not a penny more, and get an accountant to sanity-check anything you’re unsure about.