How to Avoid 40% Tax Self Employed

---

To avoid 40% tax self employed (known as the Higher Rate), you must legally reduce your taxable profits to below £50,271. The two most effective ways to do this are by claiming all your allowable business expenses and by making pension contributions.

This article explains how this works in simple terms.

(Note: These figures are for the 2025/26 tax year for England, Wales, and Northern Ireland. Scotland has different tax bands).

---

🤔 What is the 40% Tax Bracket?

First, it’s important to know that you don’t pay 40% tax on all your profits. Your income is taxed in slices or “bands”.

For the 2025/26 tax year, the rates are:

• Personal Allowance: £0 to £12,570 = 0% Tax
• Basic Rate: £12,571 to £50,270 = 20% Tax
• Higher Rate: Any profits over £50,271 = 40% Tax

You only pay 40% on the portion of your profit that falls into that top bracket. If your profit is £51,271, you only pay 40% tax on £1,000 of it. The goal is to lower your profit figure to keep it out of that self-employed higher rate tax UK bracket.

💰 3 Legal Ways to Reduce Your Self-Employed Tax Bill

Here are the main methods to legally and responsibly lower your taxable profit.

1. Claim Every Allowable Expense

This is the most important job for any self-employed person. Your “taxable profit” is your total income minus your business costs. The more costs you claim, the lower your profit.

Common allowable expenses include:

• Office Costs: Stationery, phone bills, software subscriptions.
• Travel: Fuel, parking, train tickets, and van insurance (but not “commuting” to a permanent office).
• Working from Home: A portion of your utility and internet bills, or a flat rate from HMRC.
• Professional Fees: Your accountant’s fee or business insurance.
• Stock: Any raw materials or goods you buy to sell.
• Marketing: Website costs, business cards, and advertising.

Simple Example: Your turnover is £52,000. You are £1,730 into the 40% tax band (the amount over £50,270). But you find £2,000 in allowable expenses (like van fuel, phone bills, and tools) that you forgot to claim.

Your new taxable profit is now £50,000. You are no longer in the 40% tax band.

2. Pay Into a Pension

This is a very powerful, tax-efficient tool. When you pay into a private pension, the government gives you tax relief.

• For every £80 you pay into your pension, the government automatically tops it up with £20 (the 20% basic rate relief) to make it £100.
• Because you are a higher-rate taxpayer, you can claim back the other 20% (the difference between the 40% you paid and the 20% relief you got) on your Self Assessment tax return.

This effectively reduces your taxable income, pulling you back down from the 40% threshold.

3. Other Tax-Planning Methods

• Give to Charity: If you make Gift Aid donations, this also helps. It extends your basic rate tax band, giving you more room before you hit the 40% rate.
• Consider a Limited Company: If your profits are consistently high, it might be more tax-efficient to become a limited company. This is a complex step. You would pay yourself a small salary and take the rest as dividends, which are taxed differently. This is a big decision and you must get an accountant’s advice first.

---

A Quick Note: “Planning” vs. “Evasion”

What we have discussed here is tax planning—using the rules legally to reduce your bill (like claiming expenses). This is smart and legal.

Tax evasion is illegal. This includes things like not declaring all your income or making up expenses you didn’t pay. Never do this.

✅ Final Advice

Hitting the self-employed higher rate tax UK bracket is a good sign—it means your business is successful. But it’s also the trigger to get professional help.

If your profits are near £50,000, an accountant can almost always save you more money than they cost. They will know every expense you can claim and help you plan legally to reduce your self-employed tax bill.

Disclaimer: This article is for general information only. Tax rules change, and your personal situation is unique. Always check the GOV.UK website or speak to a qualified accountant.

---