Tax planning · UK · 2025/26
How to legally reduce your Self-Employed Tax
As a sole trader you're taxed on your profit — what's left after costs. The more legitimate costs and reliefs you claim, the lower your income tax and National Insurance. Here's how, in plain English, with a tool that shows the difference.
📘This is education, not advice. Everything here uses reliefs that exist in UK law. Claiming genuine business costs is legal and expected. Inventing expenses, or not declaring income, is tax evasion — which is illegal. Keep records, and speak to an accountant before acting.
Enter your turnover, then your business expenses and any pension contribution. The tool compares the tax if you claimed nothing to the tax once you claim them.
Illustration only, using 2025/26 income tax + Class 4 NI rates. Pension relief reduces income tax but not Class 4 NI. Doesn't replace advice. Open the full self-employed calculator →
The reliefs, explained simply
Each card tells you what it is, who can use it, and what to watch out for — with a link to the official HMRC guidance.
🧾 Claim all allowable expenses
Everyone
You're taxed on profit, so every legitimate cost lowers the bill: stock, equipment, business travel, insurance, accountancy, marketing, and a reasonable share of home and phone use.
Who: all sole traders — costs incurred "wholly and exclusively" for the business.
Watch out: personal spending and normal commuting don't count. Keep receipts and records.
Official guidance →
🎁 The £1,000 trading allowance
Small / side businesses
The first £1,000 of trading income is tax-free. If your costs are below £1,000, claim the allowance instead of your actual expenses — whichever leaves you better off.
Who: anyone with trading income, especially side hustles.
Watch out: you can use the allowance or claim expenses, not both.
Official guidance →
🪙 Pension contributions
Everyone
Personal pension contributions get income tax relief at your highest rate, reducing the income tax on your profits while building retirement savings.
Who: self-employed people with relevant earnings, up to the £60,000 annual allowance.
Watch out: it reduces income tax but not Class 4 National Insurance.
Official guidance →
🛠️ Capital allowances (AIA)
Everyone
Buying equipment, tools or machinery? The Annual Investment Allowance lets you deduct the full cost (up to £1m a year) from your profit, usually in the year you buy.
Who: sole traders buying qualifying business assets.
Watch out: cars have their own rules; private-use assets are scaled back to the business proportion.
Official guidance →
📐 Simplified expenses
Everyone
Instead of working out exact costs, you can use HMRC flat rates for vehicle mileage and working from home — simpler, and sometimes better.
Who: sole traders who prefer simple record-keeping.
Watch out: for some people actual costs give a bigger deduction — compare both.
Official guidance →
🏢 Consider incorporating
Advanced
At higher profits, running a limited company and taking a small salary plus dividends can reduce overall tax and NI. It also adds admin and responsibilities.
Who: sole traders with consistent higher profits.
Official guidance →
Legal planning vs. illegal evasion
Claiming genuine costs is exactly what the system expects. Inventing them is fraud.
✓ Legal planning
Claiming real business expenses; using the trading allowance; paying into a pension; deducting equipment through capital allowances.
✗ Illegal evasion
Claiming private costs as business; inflating expenses; taking cash "off the books"; not declaring all your income.
Frequently asked questions
How can a sole trader pay less tax?
Claim every allowable expense, use the £1,000 trading allowance if it beats your actual costs, claim capital allowances on equipment, and pay into a pension. Good records make it all defensible.
What expenses can I claim?
Costs incurred wholly and exclusively for the business — stock, equipment, business travel, a fair share of home and phone, insurance, accountancy and marketing. Personal spending and commuting don't qualify.
Does a pension cut my National Insurance too?
No — pension relief reduces income tax but not Class 4 NI, which is charged on your profit.
Should I become a limited company?
Maybe, at higher profits — but it adds admin and isn't always cheaper. Compare with our corporation tax and dividend tools and take advice first.
Related
Educational guide — not tax or financial advice. UK income tax and Class 4 National Insurance for 2025/26. Reliefs have conditions and change over time. Whether they apply depends on your circumstances. Always confirm with
HMRC and a qualified accountant before acting.