Tax burden on freelancers to worsen: here are 17 ways to save on your tax bills to earn more

The UK’s tax burden for freelancers and the self-employed is undeniably high. As Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, points out, “More of us are taxpayers now, and more pay tax at higher rates. A significant proportion of taxpayers now face higher or additional rate taxes.”

The situation is likely to become more challenging. Coles warns, “We’re paying billions more in tax than we did this time last year, and it’s only going to get worse, because those tax thresholds have been frozen until April 2028.”

However, there are legitimate ways to feel less pain. The personal finance expert assures us that “there are still plenty of perfectly legal ways to boost your income without handing over a fortune to HMRC.”

• 3.2 million more people are expected to pay income tax in the current tax year than would have paid it if the personal allowance had risen with inflation, and 2.5 million more people will pay higher and additional rate tax.
• There are a projected 6.3 million higher rate taxpayers in the current tax year – up 42.6% from 2021/22, and 1.13 million paying additional rate tax – up 117.1% over the same period.
• In the current tax year, we’re expected to pay £17.8 billion in dividend tax – up £960 million in a year.

We’re paying billions more in tax than we did this time last year, and it’s only going to get worse, because those tax thresholds have been frozen until April 2028.

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown

Here are 17 strategies to retain more of your hard-earned income:

Income

Personal allowance: Make the most of your tax-free personal allowance. You can earn up to £12,570 before income tax is applied.

Rent-a-room relief: If you have a spare room, let it out and benefit from up to £7,500 in tax-free rental income.

Trading allowance: If you have a hobby that generates income, the trading allowance allows you to earn up to £1,000 tax-free.

Property allowance: Generate an additional £1,000 tax-free from property income (excluding rent-a-room relief).

Savings

Personal savings allowance: Basic-rate taxpayers can earn up to £1,000 in interest tax-free, while higher-rate taxpayers can earn £500.

Starting rate for savings: If you have a low income, you may qualify for an additional £5,000 tax-free savings allowance in addition to the personal savings allowance.

Cash ISAs: Deposit up to £20,000 in a cash ISA and enjoy tax-free interest.

Premium bonds: Consider Premium Bonds for a chance to win tax-free prizes.

Investments

Stocks & Shares ISAs: Invest in a stocks & shares ISA to benefit from tax-free income and capital gains. As Coles explains: “It’s one reason why it can be so valuable to hold ISAs when you reach the stage of life when you’ll be drawing income from your assets.”

Lifetime ISAs: If you are saving for retirement or your first home, withdrawals from a Lifetime ISA are tax-free once you reach 60 or purchase your first property.

Use dividend allowance to supplement income: You can receive up to £500 in dividend income tax-free outside of an ISA. This allowance has dropped dramatically since being introduced in 2016 at £5,000. It hit £2,000 in 2018, £1,000 in 2023 and £500 in 2024. In April 2022, the rates also rose from 7.5 % to 8.75% for basic rate taxpayers, 32.5% to 33.75% for higher rate taxpayers and from 38.1% to 39.35% for additional rate taxpayers. It has made ISAs even more valuable for those using dividends to supplement their income.

Capital gains tax allowance: When selling assets, the first £3,000 of capital gains is tax-free each year.

Tax Planning

Venture Capital Trusts (VCTs): For those comfortable with higher-risk investments, VCTs offer tax-free dividends and generous tax relief.

Share assets with your spouse: Married couples can share assets to utilise both spouses’ tax-free allowances effectively.

Insurance Income

Income Protection Payouts: Income from an income protection policy is tax-free, providing financial security if you are unable to work.

Long-term care annuities: These annuities offer tax-free income to help cover the costs of long-term care.

Purchased life annuities: These can provide a partially tax-free income stream in return for a lump sum investment.

Tax regulations can change, so stay informed and seek professional financial advice if necessary.

By implementing some or even all of these strategies, you could help your tax position and retain more of your earnings.

Examples:

ISA benefit: If you invest £20,000 in a Stocks & Shares ISA and achieve a 5% annual return, you would earn £1,000 tax-free. Outside of an ISA, a higher-rate taxpayer would pay 40% tax on this, reducing their gain to £600.

Capital gains tax: If you sell shares that have increased in value by £5,000, you can use your £3,000 Capital Gains Tax allowance to reduce your taxable gain to £2,000.

This information is intended as a general guide only and does not constitute financial advice.

Here are some suggested government sources for future reference:

Income Tax rates and Personal Allowances : Current rates and allowances – GOV.UK

How tax on savings and investments works | MoneyHelper

Individual Savings Accounts (ISAs): How ISAs work – GOV.UK