Freelancing in the UK means managing your own tax. Here are 10 essential tips that could save you thousands.
First, track every business expense. Many freelancers miss legitimate deductions. You can claim software subscriptions, co-working space fees, home office costs (either actual costs or the simplified flat rate of £6 per week), phone and internet (business proportion), professional development and courses, professional body memberships, equipment and tools, travel to client sites, and business insurance.
Second, use the trading allowance. If your freelance income is under £1,000 per year, it is completely tax-free. You do not need to register for Self Assessment or file a return.
Third, understand payment on account. In your second year of self-employment, HMRC requires two advance payments towards next year's tax bill, each equal to 50% of the previous year's liability. This means in January you might pay 150% of one year's tax. Budget for this from day one.
Fourth, set aside 25-30% of every invoice for tax. A common mistake is spending everything and being unable to pay the tax bill. Open a separate savings account and transfer the tax portion immediately when you get paid.
Fifth, register for Self Assessment as soon as you start freelancing. You must register by 5 October following the tax year you started. Late registration means penalties.
Sixth, consider the flat rate VAT scheme if you register for VAT. Instead of tracking VAT on every purchase, you pay a fixed percentage of your gross turnover. For many service businesses, this results in paying less VAT.
Seventh, contribute to a pension. Freelancers often neglect pensions because there is no employer to set one up. But pension contributions reduce your taxable income and receive tax relief at your marginal rate.
Eighth, claim mileage at HMRC approved rates rather than actual car costs — 45p per mile for the first 10,000 miles, then 25p. This is often more generous than claiming actual fuel costs.
Ninth, file your tax return early. The deadline is 31 January, but filing in April or May means you know your tax bill early and can budget accordingly.
Tenth, get accounting software. Tools like FreeAgent, Xero or QuickBooks make bookkeeping much easier and your accountant will charge less if your records are well organised.
Use our self-employed tax calculator to estimate your tax bill.