For most self-employed people, tax can be a mine field! Unlike the majority of people who have their tax dealt with through pay as you earn (PAYE) as employees, those who are self-employed bear the full responsibility of their tax liabilities. This often leads to confusion when trying to maximize deductions and meet deadlines. To help you make sense of the complexities, here are five tips that can help you reduce your taxes and keep you from potential issues.
1. Keep Detailed Records
Maintaining detailed records of your income and expenses is crucial.
Accurate bookkeeping not only makes reporting income easier but also allows you to back up any deductions you claim. I cannot recommend enough the benefit in using accounting software for self-employed individuals, once set up it can simplify the whole process. We use Xero for our clients (which is included in the monthly fee), but there are a number of other software providers that allow you to have a free trial like QuickBooks, Sage or FreeAgent.
Being organized with your records can save you hours of stress when completing your tax return and also keeps everything in place if, god forbid, you have a tax investigation! Bear in mind HMRC requires you to keep paperwork for at least 5 years after the 31st of January following the tax year they relate to. Meaning any receipts, invoices, bank statements etc for the 2023/24 tax year (6th April 2023 to April 2024) must be kept until 31st January 2030. These can be in digital format which is so much easier!
2. Know What You Can Claim
Self-employed people have the advantage of claiming deductions that PAYE employees can't.
If you work from home, you are able to claim simplified expenses for your tax return based on the hours you work if it's more than 25 hours per month. Which makes life a lot easier when it's difficult to calculate the personal and business use such as with utility bills.
Other expenses you can claim for are phone and internet costs, business mileage or travel costs, professional fees such as accountants, marketing and advertising costs etc. You can read more about the expenses you can claim for here
3. Set Aside Money for Taxes
Unlike employees who have taxes deducted from their salary, self-employed individuals are responsible for setting aside their own taxes.
Aside from the tax you need to pay, HMRC may require you to make "payments on account." These are advance payments towards your next tax bill, typically due in two installments (31st January and 31st July). Each payment is usually half of your previous year’s tax bill.
While this can feel like an additional financial burden, planning ahead and factoring these payments into your cash flow can help you avoid surprises. If your income has decreased significantly, you may be able to reduce your payments on account by submitting a request to HMRC
A good rule of thumb is to save around 25-30% of your income to cover Income Tax and National Insurance contributions. Setting up a separate savings account for taxes can make this easier.
By separating your tax savings, you won’t be caught off guard with a hefty bill in April. This proactive approach helps ensure that you meet your tax obligations without incurring late fees.
4. Take Advantage of Tax-Free Allowances
Make sure you’re making full use of available allowances. For example:
The Personal Allowance allows you to earn a certain amount tax-free each year.
If you use your home for business, you may be eligible for simplified expenses or a portion of your household bills.
The Trading Allowance allows you to earn up to £1,000 from self-employment without having to pay tax on it.
The Marriage Allowance lets a lower-earning partner transfer up to 10% of their unused Personal Allowance (£1,260) to their higher-earning partner, potentially saving up to £252 in tax annually. This applies if one partner earns below the Personal Allowance threshold and the other is in the basic rate tax band.
Understanding and applying these allowances can significantly reduce your tax bill and are worth using where allowed.
5. File Your Tax Return On Time
Obviously avoiding penalties by filing your Self-Assessment tax return before the deadline (31st January for online submissions in the UK) is a no-brainer. Submitting your return as soon as possible after the tax year ends (5th April) not only gives you peace of mind but also allows you to plan for any tax payments due. For instance, if you were to file your tax return in April...you then have a whole 9 months to pay your tax bill!
Missing the deadline can result in fines starting at £100, so it’s crucial to stay organised.
Bonus Tip: Understand Payments on Account
If you’re self-employed, HMRC may require you to make payments on account. These are advance payments towards your next tax bill, typically due in two instalments (31st January and 31st July).
Each payment is usually half of your previous year’s tax bill.
While this can feel like an additional financial burden, planning ahead and factoring these payments into your cash flow can help you avoid surprises. If your income has decreased significantly, you may be able to reduce your payments on account by submitting a request to HMRC.
Still unsure about tax?
Taxes can be complex, especially as your business grows. Hiring an accountant or tax advisor can save you time, ensure compliance, and even uncover additional savings.
At Strength in Numbers Limited, we specialise in helping self-employed individuals build stronger businesses through smart financial management.
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