Tips for Reducing Your Tax Liability

The UK tax system offers several reliefs, allowances, and UK tax deductions that can help lower your taxable income.

By claiming all eligible business expenses, using tax-free allowances, and making strategic financial decisions, you can minimise what you owe to HMRC.

A common question is, "Do self employed pay less tax?" The answer depends on your income structure and how efficiently you manage deductions.

This blog provides How to reduce tax liability in the UK? to help you navigate self assessment tax efficiently and maximise your savings.

Quick Guide to Income Tax and Self-Employment

Before looking at ways to reduce your tax bill, it’s important to understand how self-employed income is taxed in the UK.

Income Tax Bands (2024/25)

Tax Deadlines

• TRegister for self-assessment: 5th October

• Paper tax return deadline: 31st October

• Online tax return deadline: 31st January

• Tax payment deadline: 31st January (and 31st July for advance payments)

How to Legally Reduce Your Self Assessment Tax Bill

How to reduce tax liability in the UK? To legally reduce your Self Assessment tax bill in the UK, consider the following tips:

1. Claim All Allowable Business Expenses

2. Use Tax-Free Allowances and Reliefs

3. Make Charity Donations

4. Contribute to a Pension

5. Use Tax-Efficient Investments

6. Consider Incorporation

7. Split Income with Your Spouse

8. Plan Your Income and Expenses

1. Claim All Allowable Business Expenses

Self-employed individuals in the UK can often reduce their overall tax burden by utilising UK tax deductions. One of the most effective ways to reduce your tax bill is by deducting all allowable business expenses from your taxable income.

These expenses must be completely and exclusively for business use.

Following are the examples of allowable expenses:

• If you work from home, claim a proportion of rent, utilities, and internet.

• Travel and vehicle expenses include Mileage, fuel, parking, and public transport.

• Accountancy fees, business courses, and professional memberships.

• Laptops, office furniture, and cloud-based tools like accounting software.

2. Use Tax-Free Allowances and Reliefs

The UK tax system provides several allowances and reliefs that can help self-employed individuals reduce their taxable income and lower their self assessment tax bill.

By making full use of these benefits, you can legally minimise your tax liability.

These allowances cover different aspects including:

• Personal Allowance: Earn up to £12,570 tax-free.

• Trading Allowance: £1,000 tax-free income for small businesses or side hustles.

• Dividend Allowance: £500 tax-free dividends (if you own a company).

• Marriage Allowance: Transfer £1,260 of your unused allowance to your spouse.

• Rent a Room Scheme: Earn up to £7,500 tax-free by renting out a room in your home.

3. Make Charity Donations

Donating to charity is not only a great way to support good causes, but it can also help reduce your tax bill through Gift Aid relief.

Self employed and paying tax means you are subject to tax on your income, but donations made through Gift Aid can help lower that tax bill.

The following are some benefits:

• Gift Aid adds 25% to your donation (e.g., a £100 donation becomes £125 for the charity).

• TraHigher-rate taxpayers can claim back 20%-25% of their donation.

• Example: If you donate £100, the charity gets £125, and you can reclaim £25 in tax relief.

4. Contribute to a Pension

Saving for retirement is not only a smart financial decision but also a great way to reduce your tax bill.

When you contribute to a pension, the government provides tax relief, which means you get back some of the tax you’ve already paid on your income. This makes pensions one of the most tax-efficient ways to save for the future.

The following are the Benefits:

• Basic-rate taxpayers get 20% tax relief.

• Basic-rate taxpayers get 20% tax relief.

• Employer contributions (if you run a limited company) count as a tax-deductible expense.

5. Use Tax-Efficient Investments

Investing in tax-efficient schemes allows you to grow your wealth while reducing your overall tax liability.

The UK offers several investment options that provide tax relief, helping self-employed individuals and business owners keep more of their returns. Examples are:

• ISAs (Individual Savings Accounts).

• Enterprise Investment Scheme (EIS) & SEIS.

• Venture Capital Trusts (VCTs).

6. Consider Incorporation

Switching from sole trading to a limited company can provide significant tax advantages. As a sole trader, you pay income tax on all your profits, with rates increasing as your earnings grow.

In contrast, a limited company pays corporation tax on its profits, which is often lower than personal income tax rates.

Many self-employed individuals wonder, do self employed pay less tax than limited companies? The answer largely depends on how you structure your income. Benefits are:

• Corporation tax is 19% (lower than higher-rate income tax).

• Pay yourself through dividends, reducing National Insurance costs.

• Limited liability protects personal assets.

7. Split Income with Your Spouse

If your spouse helps with your business, paying them a salary is a legal way to reduce your taxable income while making full use of UK tax deductions.

For example, if you’re in the higher tax bracket (40% or 45%) but your spouse has little or no income, paying them a reasonable salary can shift some of your earnings into their lower tax band (20% or even 0% if they stay within the personal allowance of £12,570). This means less tax paid overall as a household.

8. Plan Your Income and Expenses

Managing the timing of your income and expenses can impact your tax bill. By strategically planning when you receive payments and when you incur business expenses, you can reduce your taxable income for the current tax year.

For example, if you expect to earn more in the current tax year than the next, you may choose to defer some income until the following year to stay in a lower tax bracket.

Similarly, if you expect higher earnings in the next tax year, you could accelerate business expenses into the current year to reduce your taxable profits.

Benefits:

• Delay invoicing to push income into the next tax year if expecting lower earnings.

• Claim capital allowances for large business purchases like machinery.

• Use cash-based accounting to declare income only when received, reducing taxable profits.

By following these tips, self-employed individuals can legally minimise their tax liabilities and keep more of their income. All the above are the best ways to lower your tax bill in the UK.

How dns accountants help you

We offer a range of services, including tax planning, self assessment tax return preparation, and advice on allowable expenses. Call us at 033 0088 3616, email contact@dnsaccountants.co.uk, or book a free consultation today for professional assistance designed to suit your needs.