Self-Employment Tax UK Guide 2025 | Complete Freelancer Tax Guide

Complete UK self-employment tax guide for 2025. Learn about registering as self-employed, tax returns, allowable expenses, National Insurance, and tax deadlines.

Self-Employment Tax UK Guide 2025

Everything freelancers and sole traders need to know about taxes

Tax Year: 2025/26 Reading time: 15 min
Self Assessment Tax Return Deadline
31 January 2025
For 2023/24 tax year (online submission)

Table of Contents

1. Getting Started as Self-Employed

If you work for yourself - whether as a freelancer, contractor, or running a small business - you're self-employed. This means you're responsible for calculating and paying your own taxes.

When to Register

You must register as self-employed with HMRC if:

  • You earn more than £1,000 from self-employment in a tax year
  • You want to make voluntary National Insurance contributions
  • You need to prove self-employment (e.g., for a mortgage)
Deadline: You must register by 5 October following the end of the tax year in which you became self-employed. For example, if you started in June 2024, register by 5 October 2025.

How to Register

1

Create a Government Gateway Account

Visit gov.uk and create an account if you don't have one. You'll need an email address and UK address.

2

Register for Self Assessment

Complete the online registration. You'll need your National Insurance number and personal details.

3

Receive Your UTR

HMRC will send your Unique Taxpayer Reference (UTR) by post within 10 working days. Keep this safe - you'll need it for everything.

4

Activate Your Online Account

You'll receive an activation code. Use this to link Self Assessment to your Government Gateway account.

Sole Trader vs Limited Company

Factor Sole Trader Limited Company
Setup Simple, free More complex, £12+ fee
Tax return Self Assessment Corporation Tax + personal
Liability Unlimited personal Limited to company
Tax efficiency Good up to £50k profit Better above £50k
Paperwork Less More (accounts, filings)
Starting Out? Most people start as sole traders for simplicity. Consider incorporating later when profits exceed £30,000-50,000, or if liability protection is important for your work.

2. Taxes You'll Pay

As a self-employed person, you'll pay Income Tax and National Insurance on your profits. Your "profit" is your income minus allowable expenses.

Income Tax Rates 2025/26

Band Taxable Income Rate
Personal Allowance £0 - £12,570 0%
Basic Rate £12,571 - £50,270 20%
Higher Rate £50,271 - £125,140 40%
Additional Rate Over £125,140 45%

National Insurance 2025/26

Class When You Pay Rate
Class 2 Profits over £12,570 Abolished April 2024 (voluntary available)
Class 4 Profits £12,570 - £50,270 6%
Class 4 Profits over £50,270 2%

Example: Tax on £40,000 Profit

Income Tax:

  • First £12,570: £0 (Personal Allowance)
  • £12,571 - £40,000 (£27,430): £5,486 (at 20%)

National Insurance (Class 4):

  • £12,571 - £40,000 (£27,430): £1,646 (at 6%)

Total Tax: £7,132

Take-Home: £32,868 (82.2% of profit)

Trading Allowance

If your self-employed income is under £1,000 per year, you don't need to:

  • Register as self-employed
  • Pay tax on this income
  • File a tax return (for this income)

You can also choose to use the £1,000 allowance instead of claiming actual expenses if it's more beneficial.

3. Allowable Expenses

Reducing your taxable profit with legitimate business expenses is the key to minimising your tax bill. You can only claim expenses that are "wholly and exclusively" for business purposes.

Office & Workspace

  • Rent for business premises
  • Business rates and water rates
  • Light, heat, and power for business premises
  • Property insurance and security
  • Home office costs (proportion of bills)

Equipment & Technology

  • Computer, laptop, phone (business use proportion)
  • Software and subscriptions
  • Office furniture and equipment
  • Stationery and printing
  • Professional tools and equipment

Travel & Vehicles

  • Business travel (not commuting)
  • Car running costs (business mileage proportion)
  • Or simplified mileage: 45p/mile first 10,000, then 25p/mile
  • Public transport for business
  • Hotels and meals on business trips

Professional Services

  • Accountant fees
  • Legal fees (related to business)
  • Professional indemnity insurance
  • Professional body memberships
  • Bank charges on business account

Marketing & Sales

  • Website hosting and development
  • Advertising and marketing
  • Business cards and promotional materials
  • Trade show and conference costs
  • Client entertainment (limited)

Staff & Subcontractors

  • Employee wages and salaries
  • Employer National Insurance
  • Subcontractor payments
  • Training costs (for you or staff)
  • Recruitment costs

Working From Home

If you work from home, you can claim a proportion of household costs:

  • Simplified method: £6/week (£312/year) flat rate, no receipts needed
  • Actual costs method: Calculate proportion based on rooms/hours used for business
Which Method? If your home office costs exceed £312/year, use actual costs. Calculate: (business room area ÷ total home area) × (rent + utilities + insurance + council tax). Then apply time spent working at home.

What You CAN'T Claim

  • Personal expenses (even if mixed use - only business proportion)
  • Client entertaining (not deductible, unlike staff entertainment)
  • Fines and penalties
  • Donations (to individuals, not charities)
  • Your own labour costs
  • Drawings from the business

4. Keeping Records

You must keep records of all your income and expenses. HMRC can ask to see them for up to 5 years after the tax return deadline.

What to Keep

  • All sales invoices issued
  • All purchase receipts and invoices
  • Bank statements (business and personal if mixed)
  • Mileage logs if claiming vehicle expenses
  • Contracts and agreements
  • Proof of larger purchases (equipment, etc.)

Digital Record Keeping

Making Tax Digital (MTD) for Income Tax is coming. From April 2026 (for income over £50,000), you'll need to keep digital records and submit quarterly updates. Good practice to start now:

  • Accounting software: FreeAgent, Xero, QuickBooks, Wave (free)
  • Receipt scanning: Most accounting apps have this built in
  • Bank feeds: Link bank account to automatically import transactions
  • Cloud backup: Never lose your records

Mileage Logs

If claiming vehicle expenses, keep a log with:

  • Date of journey
  • From/to locations
  • Business purpose
  • Miles travelled

Apps like MileIQ or Hurdlr can automate this using your phone's GPS.

HMRC Enquiries: If HMRC investigates and you can't prove expenses with records, they'll be disallowed. You may also face penalties. Good record-keeping is insurance.

5. Filing Your Tax Return

Self Assessment tax returns are filed annually after the tax year ends. The tax year runs from 6 April to 5 April.

Key Deadlines for 2023/24 Tax Year

Deadline What Penalty if Missed
5 October 2024 Register for Self Assessment (new taxpayers) Varied
31 October 2024 Paper tax return deadline £100
31 January 2025 Online tax return deadline £100
31 January 2025 Pay tax owed Interest + 5% after 30 days
28 February 2025 3 months late filing £10/day (max 90 days)
31 July 2025 6 months late filing Greater of £300 or 5% of tax

How to File Online

  1. Log into your HMRC online account
  2. Select "Complete your tax return"
  3. Enter self-employment income and expenses
  4. Add any other income (employment, rental, dividends)
  5. Claim any reliefs (pension contributions, Gift Aid)
  6. Check the calculation and submit
  7. Note the amount owed and payment deadline

Information You'll Need

  • Total income from self-employment
  • Total allowable expenses
  • P60 or payslips (if also employed)
  • Interest received statements
  • Dividend vouchers
  • Pension contribution receipts
  • Gift Aid donation records
  • Student loan details (if applicable)

6. Payments on Account

If your tax bill is over £1,000 (and less than 80% collected at source), you'll need to make "Payments on Account" - advance payments towards next year's tax.

How Payments on Account Work

  • Each payment: 50% of your previous year's tax bill
  • First payment: 31 January (with current year's balance)
  • Second payment: 31 July
  • Balancing payment: Following 31 January (if you owe more)

Example: First Year Payment Shock

Year 1 tax bill: £6,000

  • 31 January Year 2: £6,000 (Year 1 tax) + £3,000 (50% payment on account) = £9,000 due
  • 31 July Year 2: £3,000 (second payment on account)
  • Total paid in Year 2: £12,000

This is why the second year is often a shock - you're paying last year's tax PLUS advance payments for this year.

Reducing Payments on Account

If you expect lower profits this year, you can apply to reduce payments on account. Be careful - if you reduce too much and owe more, HMRC charges interest.

Budget Tip: Set aside 25-30% of all income for tax. Keep it in a separate savings account. You'll never be caught short, and you'll earn interest while waiting to pay.

7. VAT for Self-Employed

VAT (Value Added Tax) is separate from income tax. You must register for VAT if your taxable turnover exceeds £90,000 in any 12-month period.

VAT Registration Thresholds

Threshold Amount (2025/26) Action
Compulsory registration £90,000 Must register within 30 days
Expected to exceed £90,000 Must register immediately
Voluntary registration Any amount Can choose to register
Deregistration Below £88,000 Can apply to deregister

VAT Schemes

  • Standard VAT: Charge 20% VAT, reclaim VAT on purchases, quarterly returns
  • Flat Rate Scheme: Pay fixed percentage of turnover (depends on sector). Simpler, may pay more or less VAT
  • Cash Accounting: Account for VAT when paid/received, not invoiced. Helps cash flow
  • Annual Accounting: One return per year (with interim payments). Less admin

When Voluntary VAT Registration Makes Sense

  • You make lots of VAT-able purchases (you can reclaim the VAT)
  • Your clients are VAT-registered businesses (they can reclaim your VAT)
  • It makes you look more established

When to Avoid VAT Registration

  • You sell to individuals (they can't reclaim VAT - you become 20% more expensive)
  • Low expenses (little VAT to reclaim)
  • You prefer simplicity

8. Tax-Saving Strategies

Pension Contributions

The most powerful tax-saving tool for self-employed people:

  • Contributions receive tax relief at your marginal rate
  • Basic rate: £80 becomes £100 in your pension (20% relief)
  • Higher rate: Claim additional 20% via tax return
  • Annual limit: £60,000 or 100% of earnings (whichever lower)
  • Reduces taxable profit, potentially keeping you in lower band
Example: Self-employed person earns £60,000. Contributing £10,000 to pension means:
  • Taxable profit reduced to £50,000 (stays in basic rate band)
  • Tax saved: £4,000 (£10,000 × 40% avoided)
  • Net cost: £6,000 for £10,000 in pension

Timing Income and Expenses

  • If expecting lower income next year, delay invoicing clients until after 5 April
  • If expecting higher income next year, accelerate expenses into current year
  • Buy equipment before tax year end if you need it anyway
  • Make pension contributions strategically

Use Your Spouse

If your spouse doesn't use all their Personal Allowance:

  • Employ them in the business (must do genuine work)
  • Pay them up to £12,570 tax-free (deductible expense for you)
  • They must be registered for PAYE even if no tax due
  • Keep records of work done to justify payments

Consider Incorporation

When profits exceed £30,000-50,000, a limited company may save tax:

  • Corporation Tax at 19-25% (vs up to 45% income tax)
  • Pay yourself optimal salary + dividends
  • More pension contribution flexibility
  • But: more paperwork, accountancy costs, IR35 considerations

Claim Everything You're Entitled To

  • Marriage Allowance: Transfer £1,260 to spouse (if they're basic rate)
  • High Income Child Benefit Charge: Claim if partner earns less
  • Working from home allowance: Even if small, it's free money
  • Professional subscriptions: Often forgotten
  • Training costs: If related to your current work

Related Calculators

Plan your self-employment finances with our free tools:

UK
UK Calculator Tax Team

Our tax specialists help freelancers and sole traders understand their obligations. This guide reflects current HMRC rules for the 2025/26 tax year.

Last updated: January 2025