Tax When You’re Self-Employed
Everything HMRC expects from you when you work for yourself
Sole Trader vs Limited Company
| Feature | Sole Trader | Limited Company |
|---|---|---|
| Setup | Register online, done in 10 mins | Companies House registration, articles |
| Tax on profits | Income tax (20/40/45%) | Corporation tax (25%) + personal tax on extraction |
| NI | Class 2 + Class 4 | Employer + Employee NI on salary |
| Admin | Self Assessment | Annual accounts, Corporation Tax return, SA |
| Liability | Personally liable | Limited to company assets |
| Best for | Profits under ~£35k | Profits above ~£35k |
Key Concept
Most people start as a sole trader — it’s simpler and cheaper. You can always incorporate later when profits justify the extra admin. The crossover point is roughly £35,000– £50,000 in profit, depending on how much you need to take out.
What You Can Claim as Expenses
Allowable expenses reduce your taxable profit. The golden rule: they must be “wholly and exclusively” for business purposes.
- Office supplies, equipment, software
- Business travel and mileage (45p/mile for first 10,000 miles)
- Phone and internet (business proportion)
- Professional development and training
- Accountancy fees
- Marketing and advertising
- Insurance (professional indemnity, public liability)
- Subcontractor costs
Working from Home
You can claim simplified expenses of £6/week (£312/year) without receipts, or calculate the actual proportion of household bills used for business (more effort but potentially more valuable).
Payment on Account: The First-Year Shock
Here’s where self-employment gets painful. HMRC doesn’t just want tax for the year gone — they want advance payments for next year too.
Real-World Example
Your first year’s tax bill is £6,000. HMRC asks for the £6,000 PLUS 50% payment on account for next year (£3,000). Total: £9,000 due in January. Then another £3,000 in July. Many new freelancers don’t see this coming. Save 25–30% of everything you earn into a separate account from day one.
Making Tax Digital (MTD)
From April 2026, self-employed people earning over £50,000 must keep digital records and submit quarterly updates to HMRC using compatible software. This extends to those earning over £30,000 from April 2027. It’s the end of the annual tax return as we know it.
Records You Must Keep
- All income received (invoices, bank statements)
- All business expenses (receipts, records)
- Mileage logs for business travel
- Bank statements showing business transactions
- VAT records if VAT registered (turnover over £90,000)
Keep records for at least 5 years after the 31 January submission deadline.
Warning
The Self Assessment deadline is 31 January (online) or 31 October (paper). Late filing incurs an automatic £100 penalty plus interest. Late payment adds 5% surcharges. Set a calendar reminder for December to sort your return.