Freelancers and contractors often work under unique conditions that affect their tax obligations. We see many self-employed professionals who find it easy to overlook allowances, record-keeping rules or recent changes in regulations. Below, we offer practical tax planning tips for freelancers and contractors that can help you handle your taxes with greater efficiency.
Manage your income and expenses
It helps to keep business finances distinct from personal finances. A separate business bank account allows you to track income and costs more accurately. With this approach, you can quickly see which payments relate to your business, which streamlines your year-end procedures. You should also consider using simple accounting software or an online tool that captures sales and expenses in real time.
Review your monthly earnings to decide how best to structure payments, especially when you are close to a tax threshold. In the 2025/26 tax year, the personal allowance remains at £12,570, so if you earn above this level, you’ll begin paying income tax. The higher-rate threshold remains at £50,270, and the additional-rate threshold stays at £125,140. If you notice your profits growing near those levels, you may opt to make certain investments or adjust your billing schedule to manage your liabilities.
Keep track of your allowable expenses
Allowable expenses can directly reduce your tax bill if you record them properly. You can claim costs linked to the day-to-day running of your business, such as office supplies, software subscriptions and certain utility bills if you work from home. For more details on allowable expenses, review HMRC’s official guidance.
Consider mobile phone usage, internet bills and travel expenses that are specifically for business reasons. If you mix personal and work usage, only the business portion can be claimed. Clear record-keeping is key. Keep receipts, invoices and bank statements in one place so you can provide proof if HMRC ever requests it.
Understand IR35 implications
IR35 affects those who provide services through a personal company but act in a way that, for tax purposes, resembles an employee. If you work for a business on a contract basis, you need to check if the IR35 rules apply. This can influence how much tax you pay and whether you handle your own national insurance contributions.
Misclassifying your status may lead to penalties and unexpected tax bills, so it’s wise to speak to a specialist if you’re unsure about your position. For an overview of how the rules work, see HMRC’s guidance on IR35. We can also help at HW Associates if you have questions about your IR35 status.
Take advantage of pension contributions
Pension contributions can reduce your taxable income, which may bring down your overall tax bill. Contributions made through your limited company can be accounted for as a business expense, offering further savings on corporation tax. The annual pension allowance remains at £60,000 for 2025/26, though the actual amount you can pay in and claim as relief depends on your earnings. If you don’t use the full allowance in one tax year, you may carry it forward for up to three years, which can increase how much you put into your pension.
Utilise ISAs
If you’re a sole trader or contractor, individual savings accounts (ISAs) let you invest money without paying tax on the interest or gains, within certain limits. The ISA allowance for 2025/26 is expected to stay at £20,000. While this does not directly reduce your business taxes, it keeps more of your savings untouched by tax, which can be helpful in the long term. You might consider a stocks and shares ISA if you’re comfortable with investment risk, or a cash ISA if you prefer stable returns.
Plan for VAT registration
Many freelancers and contractors wonder when it makes sense to register for VAT. The threshold for mandatory VAT registration remains at £90,000 turnover in a 12-month period for the 2025/26 tax year. If you exceed (or expect to exceed) this figure, you must register. You can also opt for voluntary registration if your turnover is below this amount. This choice can boost your professional image and allow you to reclaim VAT on business expenses, but it also means you must charge VAT to clients and follow HMRC’s requirements for VAT returns.
Before registering, check whether your clients can claim VAT. If they are mostly private individuals, charging VAT could price you above competitors. On the other hand, if your clients are VAT-registered businesses, they can often reclaim the VAT you charge, so it may not affect them.
Common pitfalls to avoid
- Mixing personal and business expenses: If you put personal costs on your business books, you risk incorrect claims. Keep records clear to avoid surprises later.
• Missing deadlines: Filing your tax return or VAT returns late can lead to penalties. Mark dates on your calendar or set electronic reminders.
• Poor record-keeping: Inadequate record-keeping can lead to missing out on allowable expenses. It also makes any HMRC checks more stressful.
• Ignoring IR35: Some freelancers overlook IR35 until they face a tax investigation. Review your status regularly and adjust your approach if your contracts change.
Actionable advice for reducing liabilities
- Invoice timing: If you’re on the edge of a tax threshold, consider whether you should delay or bring forward invoices near the end of the tax year.
• Spreading purchases: If you plan to buy equipment, software or other major items, look at how you can spread those costs across the tax year to maximise relief.
• Regular reviews: Schedule periodic reviews of your accounts rather than waiting until the year end. This can highlight potential issues early and let you make smart decisions about billing and expenses.
• Seek professional help: Our team at HW Associates is available for consultations on tax planning, financial compliance and bookkeeping. Early advice can often save money in the long run.
We’re here to assist you
Freelancers and contractors have the freedom to shape their work, but that freedom brings a set of rules that can be overlooked if you’re busy serving clients. Simple measures like separating business and personal finances, claiming all allowable expenses and reviewing IR35 status can make a difference to your results in the 2025/26 tax year. When you add pension contributions and ISAs to the mix, you create a healthier financial future for yourself. Keep on top of your tax responsibilities throughout the year, and you’ll have more room to focus on delivering your expertise without added stress.
If you would like further guidance, get in touch. We’re here to help you create a stable foundation for your business and improve your financial position with our tax planning tips for freelancers and contractors.