How to Reduce Tax Bill as a UK Freelancer

While paying taxes is a citizen’s responsibility, there are methods for lowering your tax payment and keeping more of your hard-earned money. This blog article will look at how to reduce tax bills in the UK.

Ways on How to Reduce Tax Bill UK

1. Understand your tax obligations

Before going into tax-saving measures, it's important to understand your tax duties as a UK freelancer. Here is what you need to do:

• Register as self-employed with the HMRC.
• Complete a yearly self-assessment tax return.
• Pay Income Tax and National Insurance Contributions (NICs).
• Register for VAT if your turnover reaches the threshold (currently £90, 000).

2. Claim all allowable expenses

One of the most efficient strategies to reduce tax bills in the UK is to declare all allowable expenses. These are expenses spent "wholly and exclusively" for your company. Common allowable expenses include the following:

• Office supplies and equipment
• Travel expenses (excluding commuting)
• Marketing and advertising expenditures
• Professional subscriptions and training
• Home office expenses (if you work from home)
• Insurance and professional indemnity

3. Use the trading allowance

If you're starting or earning a minimal income from freelancing, think about utilising the £1,000 trade allowance. This allows you to earn up to £1,000 tax-free from self-employment or casual work. If you utilise this allowance, you cannot claim any costs.

4. Improve your accounting method

Select the most appropriate accounting technique to reduce your tax bill:

• Cash-basis accounting is the practice of recording revenue and costs as they are received or paid. It is easy and might help if you have outstanding debts.

• Traditional accounting involves recording revenue and spending by invoice date. This can be beneficial if you have a large number of overdue debts.

Consult a tax expert from Taxd to find the best technique for your case.

5. Contribute to a pension

Pension contributions is another great method to minimise your taxable income while preparing for retirement. As a freelancer, you can contribute to a personal pension and get tax breaks on your payments. The amount of tax relief is dependent on your income tax rate.

• Basic rate taxpayers get 20% tax savings.
• Higher-rate taxpayers get a 40% tax reduction.
• Additional rate taxpayers get 45% tax savings.

Consider setting up a Self-Invested Personal Pension (SIPP) to get better control over your finances.

6. Use tax-free savings accounts

Make use of tax-free savings accounts to protect your earnings:

• Individual Savings Account (ISA): You can save or invest up to £20,000 every tax year, tax-free.
• Lifetime ISA: If you're under 40, you can save up to £4,000 each year while receiving a 25% government bonus.

7. Claim the work-from-home allowance

If you work from home, you may deduct a percentage of your living expenses as business expenses. You have two choices:

• Simplified method: Claim a fixed charge of £6 per week (£26 per month) without giving proof of expenditures.

• Calculated method: Determine the real expenditures based on the percentage of your house utilised for business and the amount of time you spend working there.

8. Time your income and expenses

Strategic scheduling of income and spending can assist in lowering your tax bill:

• Defer income: If you're about to enter a higher tax rate, try deferring bills until the next tax year.
• Accelerate expenditures: Make the essential purchases before the tax year closes so that you can claim them in the current year.

Note: Avoid intentionally manipulating your income or spending since this might be considered tax avoidance.

9. Claim capital allowances

If you buy equipment or machinery for your freelancing business, you could be entitled to claim capital allowances. This lets you deduct part or all of the item's worth from your earnings before paying taxes. The Annual Investment Allowance (AIA) now lets people deduct the entire cost of most equipment and machinery up to £1 million.

10. Consider incorporating your business

Depending on your revenue and business structure, it can be advantageous to establish your freelancing business as a limited company. This can provide tax benefits, such as:

• Lower corporate tax rates compared to higher income tax rates.
• More freedom in how you collect money (salary or dividends).

Bottom Line

I hope now you know how to reduce your tax bill for the UK self-employed. While these methods can help you lower your tax payment, tax law is complicated and always changing. Consider using Taxd to save you more money and complete compliance while reducing your tax burden.

FAQs

1. Do I need to register as self-employed if I freelance part-time?

If you make more than £1,000 from freelance work in a tax year, even part-time, you must register with HMRC as self-employed. This £1,000 is the trading allowance. If your freelance income is below this amount, you will not need to register, but check with HMRC.

2. Can I deduct my daily travel as a business expense?

In general, no. Your commute to work, even to a client's office, is a personal expenditure and cannot be claimed as a business expense. If you're commuting to a temporary job or between work sites throughout the day, these travel charges are normally permitted.

3. How do I compute tax reserve?

Save 20-30% of your salary for taxes. Your income tax and national insurance should be covered. Total income and tax bracket determine the amount. In the base rate tax bracket (up to £50,270 in 2024/25), 25% is usually enough. If you have additional income or a higher tax bracket, you will need to save more. Overestimating and having a surplus is preferable to being short on your tax payment.

4. Does using Taxd help?

Yes, Taxd can help:

• Claim all qualifying costs.
• Optimise tax strategy.
• Follow HMRC rules.
• Reduce accounting and tax prep time.
• Give business structure and development recommendations.