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Self-employed people pay income tax and National Insurance on their profits — not their revenue. The gap between the two is what you legitimately deduct as allowable business expenses. Getting this right, and understanding the other legal tools available, can make a significant difference to your annual tax bill.
Allowable Business Expenses
HMRC allows you to deduct expenses that are incurred “wholly and exclusively” for the purposes of your business. These reduce your taxable profit, which reduces your tax bill.
Common allowable expenses:
- Office costs: Stationery, printer ink, postage, software subscriptions used for work
- Travel: Mileage at the HMRC approved rate (45p per mile for the first 10,000 miles; 25p thereafter), train tickets, parking for business travel (not commuting to a fixed place of work)
- Equipment: Computers, phones, cameras, tools — used for your business
- Marketing and advertising: Website costs, business cards, online advertising, social media ads
- Professional subscriptions: Industry memberships, professional journals, relevant trade body fees
- Accountant and professional fees: Accountancy fees, legal costs for business purposes
- Bank charges: Business bank account fees, payment processing fees
- Training: Courses and learning that maintains or improves skills relevant to your existing business (not courses to train in a new profession)
- Stock and materials: Raw materials, goods for resale
- Insurance: Professional indemnity, public liability, business equipment insurance
Not allowable: Personal expenses, the cost of entertaining clients (entertaining is specifically excluded), fines, payments that have a personal element.
Working from Home Allowances
If you work from home, you can claim a proportion of household costs:
Simplified flat rate (no calculation required):
– 25–50 hours/month working from home: £10/month
– 51–100 hours/month: £18/month
– 101+ hours/month: £26/month
Actual costs method: Calculate the business proportion of actual household bills (utilities, broadband, rent/mortgage interest, council tax) based on the number of rooms used for work and the proportion of time they’re used for business. More complex but often produces a larger deduction.
Pension Contributions
Pension contributions are one of the most powerful tax reduction tools for self-employed people. They are fully deductible against income tax, meaning:
- A £1,000 pension contribution costs a basic rate (20%) taxpayer effectively £800
- A £1,000 pension contribution costs a higher rate (40%) taxpayer effectively £600
Contributions are subject to the annual allowance (£60,000 or 100% of earnings, whichever is lower). For self-employed people without an employer pension, a SIPP (self-invested personal pension) is the standard vehicle.
If you’re in the 60% effective marginal tax rate trap (earnings between £100,000 and £125,140, where the personal allowance is tapered), pension contributions above £100,000 income are exceptionally tax-efficient — each £1 contributed to a pension can save up to 60p in tax.
The Trading Allowance
If your self-employment income is below £1,000 per year, you can claim the trading allowance and pay no tax — without filing a Self Assessment return for the self-employment income. If income is above £1,000, the trading allowance doesn’t help unless your expenses are below £1,000 (in which case you deduct the allowance instead of actual expenses).
Consider Your Business Structure
Sole trader vs limited company: As a sole trader, all profits are subject to income tax and Class 4 National Insurance (9% on profits between £12,570 and £50,270; 2% above). As a limited company director, you pay corporation tax on profits (25% for 2024/25 for profits above £250,000; 19% for profits under £50,000) but can take income as a combination of salary and dividends, which can be more tax-efficient at higher income levels.
The crossover point where incorporating becomes tax-efficient varies with your income and circumstances — typically somewhere between £35,000 and £50,000 net profit per year, though this depends on many factors. An accountant should run the numbers for your specific situation.
Use Your Partner’s Tax Allowances
If you have a spouse or civil partner who earns below the personal allowance (£12,570), there may be scope to involve them in the business (as a genuine business partner or employee) to use their allowances and lower tax bands. This must reflect genuine work and be paid at market rates to withstand HMRC scrutiny.
Capital Allowances
When you buy equipment for your business, you can claim Annual Investment Allowance (AIA) on up to £1,000,000 of qualifying expenditure per year — meaning the full cost of equipment comes off your taxable profit in the year of purchase, rather than being depreciated over time.
This means buying a £3,000 laptop for your business reduces your taxable profit by £3,000 in that tax year.
Summary
Self-employed people have more legal tax reduction tools than employees — the key is using them systematically:
- Claim all allowable expenses — if it’s wholly and exclusively for business, it’s deductible
- Use the working from home allowance — even the simplified flat rate saves tax without calculation
- Maximise pension contributions — the most powerful tax reduction tool, especially for higher earners
- Keep proper records — HMRC can request evidence of any expense claim; receipts and mileage logs matter
- Speak to an accountant — the fee is itself deductible, and for incomes above £40,000, they typically save more than they cost
Next read: How to claim tax relief on pension contributions UK | https://moneyunpacked.com/how-to-claim-tax-relief-on-pension-contributions-uk/