How to Reduce Your Tax Bill Legally
Introduction
As a self-employed person, you have more opportunities to reduce your tax bill than employees. This guide covers legitimate strategies to minimise Income Tax and National Insurance while staying fully compliant with HMRC rules.
Claim All Allowable Expenses
The most straightforward way to reduce tax is claiming all legitimate business expenses.
Commonly Missed Expenses
- Home office costs - Flat rate or proportion of bills
- Phone and internet - Business use proportion
- Professional subscriptions - Trade bodies, software
- Training - Courses to maintain/improve skills
- Bank charges - Business account fees
- Mileage - Business travel at HMRC rates
- Accountancy fees - Professional advice costs
Record Keeping
Keep receipts and records for at least 5 years. Digital copies are acceptable.
Use Pension Contributions
How It Works
Personal pension contributions receive tax relief at your marginal rate:
- Basic rate (20%): £80 becomes £100 in your pension
- Higher rate (40%): Claim extra 20% through Self Assessment
- Additional rate (45%): Claim extra 25% through Self Assessment
Annual Allowance
You can contribute up to £60,000 per year (or 100% of earnings, whichever is lower) with full tax relief.
Example
If you contribute £10,000 to a pension:
- Pension provider adds £2,500 (basic rate relief)
- Higher rate taxpayer claims additional £2,500 on tax return
- Total cost to you: £5,000 for £12,500 in pension
Capital Allowances
Annual Investment Allowance (AIA)
Deduct the full cost of qualifying equipment in the year of purchase, up to £1,000,000.
Qualifying Items
- Computers and technology
- Tools and machinery
- Office furniture
- Commercial vehicles
Writing Down Allowance
Items not covered by AIA can be claimed over time:
- Main rate: 18% per year
- Special rate: 6% per year (integral features, cars)
Use the Trading Allowance
If your self-employment income is £1,000 or less, you don't need to report it or pay tax on it.
If income exceeds £1,000, you can choose to:
- Deduct the £1,000 allowance instead of actual expenses, OR
- Claim actual expenses if they're higher
Split Income with Spouse/Partner
Partnership Structure
If your spouse or partner works in your business, consider a partnership:
- Allocate profits based on work contribution
- Each partner uses their own Personal Allowance
- Can reduce overall tax if one partner has lower income
Employed by Your Business
If your business earns enough, you could employ your spouse:
- Pay them a salary up to the NI threshold (£12,570)
- Claim the salary as a business expense
- They must do genuine work for the business
Timing Your Income and Expenses
Accelerate Expenses
If you're having a high-profit year:
- Make planned purchases before year end
- Pay annual subscriptions early
- Complete repairs and maintenance
Defer Income (If Appropriate)
If income is unusually high:
- Delay invoicing until after 5 April if cash flow allows
- Accept payment in next tax year (if agreed with client)
Note: This must be genuine timing, not artificial arrangements.
Use Simplified Expenses
HMRC simplified expenses can sometimes give better deductions:
Vehicles
| Miles | Rate |
|---|---|
| First 10,000 | 45p per mile |
| Over 10,000 | 25p per mile |
Working From Home
| Hours/month | Monthly rate |
|---|---|
| 25-50 | £10 |
| 51-100 | £18 |
| 101+ | £26 |
Calculate whether simplified or actual expenses give a better result.
Pension vs ISA vs Keeping Cash
Pension Contributions
Pros: Best tax relief, grows tax-free Cons: Can't access until age 55 (rising to 57)
ISA Savings
Pros: Tax-free growth, accessible anytime Cons: No tax relief on contributions
Keeping Cash
Pros: Immediate access Cons: Taxed on interest, no growth benefits
Consider a mix based on your needs and timescales.
What NOT to Do
Avoid These Mistakes
- Claiming personal expenses - Must be wholly for business
- Hiding income - HMRC receives data from banks and platforms
- Fake expenses - Fraud carries serious penalties
- Overly aggressive schemes - "Too good to be true" often is
HMRC Scrutiny
HMRC uses data analytics to identify unusual patterns. Stick to legitimate tax planning.
When to Get Professional Help
Consider an Accountant If
- Profits exceed £30,000-£40,000
- You're considering incorporating
- Complex income sources
- Significant investments or property
- Planning for retirement
The cost often pays for itself in tax savings and peace of mind.
FAQs
Is tax avoidance legal?
Legal tax avoidance (using allowances and reliefs) is fine. Illegal tax evasion (hiding income, false claims) is criminal.
How much can I save?
Depends on your situation. Higher earners benefit most from pension contributions and proper expense claims.
Should I incorporate to save tax?
Generally worth considering when profits consistently exceed £30,000-£40,000, but factors beyond tax matter too.
Conclusion
Reducing your tax bill legally is about good record-keeping, claiming everything you're entitled to, and planning ahead. Focus on pension contributions, capital allowances, and full expense claims. If in doubt, professional advice is a worthwhile investment.
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