How to Avoid Paying 40% Tax if You’re Self-Employed in the UK

by | Oct 6, 2025 | Latest Posts

Legal Ways to Avoid Paying 40% Tax When You’re Self-Employed

Why Self-Employed People Pay 40% Tax

If you’re self-employed in the UK, you pay tax on your profits. The rates are:

  • 20% (basic rate) on income up to £50,270
  • 40% (higher rate) on income between £50,271 and £125,140
  • 45% (additional rate) above £125,140

So, once your self-employed profits push you over £50,270, you start paying 40% tax on the extra.

But the good news is there are legal ways to reduce your taxable income and keep more of your hard-earned money.

Smart Ways to Reduce or Avoid 40% Tax

  1. Claim All Allowable Expenses

Make sure you deduct all business costs before tax, such as:

  • Office rent or home office costs
  • Travel and mileage
  • Equipment and tools
  • Professional fees (e.g. accountant)
    Every £1 claimed as expenses reduces your taxable profit.

  1. Use the Personal Allowance and Marriage Allowance

  • Everyone gets a £12,570 tax-free allowance.
  • If your partner earns less than this, you may be able to transfer part of their unused allowance through the Marriage Allowance.

  1. Contribute to a Pension

Paying into a pension is one of the best ways to reduce taxable income. Contributions reduce your profits for tax purposes, and you also get tax relief.

  1. Make Use of the Annual Investment Allowance (AIA)

If you need new machinery, tools, or computers, the AIA lets you deduct the full cost against your profits (up to £1m).

  1. Consider Incorporating a Limited Company

Sometimes it’s more tax-efficient to switch from sole trader to limited company. As a company director, you can take a mix of salary and dividends, which may reduce how much income tax and National Insurance you pay.

  1. Use ISAs for Savings

Instead of leaving money in a savings account (and paying tax on interest), put it into an ISA, where returns are tax-free.

FAQs

  1. Is it legal to avoid paying 40% tax?
    Yes – as long as you use allowances, expenses, and planning strategies. This is called tax efficiency, not tax evasion.
  2. Should I switch to a limited company to save tax?
    Possibly. Many high-earning sole traders benefit from setting up a company, but it depends on your situation.
  3. What expenses can I claim as self-employed?
    Anything that is wholly and exclusively for business – travel, equipment, software, phone bills, and office costs.
  4. Does pension saving really reduce tax?
    Yes. Every £1 you put into a pension reduces taxable profits, plus you get government tax relief.
  5. Can an accountant help me reduce tax?
    Absolutely. An accountant ensures you claim all expenses and plan ahead to avoid paying unnecessary higher-rate tax.

Final Thoughts

If you’re self-employed and earning above £50,270, you don’t have to accept a 40% tax bill without question. By using allowances, expenses, pensions, and smart planning, you can legally reduce tax and keep more of your profits.

👉 Want to pay less tax and grow your business smarter? Get in touch today for expert advice tailored to your self-employed finances.

Apply For a Call – Skynet Accounting – Accountants For Manufacturing & Engineering

Written by Yesim Tilley Founder of Skynet Accounting

Follow me on LinkedIn: www.linkedin.com/in/skynet-yesim-tilley

www.skynetaccounting.co.uk