The Complete UK Self-Employed Tax Allowance Guide (2025/26)

Personal allowance (£12,570)

The most important UK allowance: your first £12,570 of income is tax-free. For self-employed people, this means the first £12,570 of profit (after allowable expenses) attracts no income tax. Note it tapers down by £1 for every £2 above £100,000 of "adjusted net income" — gone entirely at £125,140.

Trading allowance (£1,000)

If your self-employed income is under £1,000/year, you don't need to register for Self-Assessment at all — the trading allowance covers it. If your income is above £1,000, you can either:

• Claim actual expenses (recommended if expenses exceed £1,000), or
• Use the £1,000 trading allowance INSTEAD of expenses

For brand-new sole traders without significant costs, the trading allowance is the simpler route — you take it off gross income with no receipts needed.

Marriage allowance (£1,260)

If your spouse or civil partner earns less than £12,570 (the PA) and you earn between £12,570 and £50,270 (basic-rate band), they can transfer £1,260 of unused PA to you. This saves you 20% × £1,260 = £252/year. Backdate up to 4 years if you've never claimed.

Real-world example: spouse stays home or works part-time earning £10,000/year. They have £2,570 of unused PA. They transfer £1,260 of it to you. Your tax bill drops by £252/year. Free money — most eligible couples don't claim.

Allowable business expenses

You can deduct any cost that's "wholly and exclusively" for your business:

• Office costs: rent, utilities, broadband, phone, stationery, postage
• Travel: mileage (45p/mile for first 10,000 miles, 25p after), train, taxi, parking, hotels — excluding commuting
• Staff: wages, employer NI, employer pension, subcontractor payments
• Premises: rates, rent, utilities, insurance, repairs
• Stock and materials: what you sell, materials to make it, packaging, freight
• Professional services: accountant, solicitor, bookkeeper, consultant
• Marketing: website hosting, ads, business cards, branded materials
• Insurance: public liability, professional indemnity, equipment
• Bank charges and interest: business bank account fees, business loan interest, business credit card interest
• Software and subscriptions: accounting software, design tools, industry-specific tools
• Training and CPD: training to keep current skills (NOT to acquire new skills entirely)
• Capital allowances: on equipment, computers, vans (up to £1M Annual Investment Allowance covers most)

The "wholly and exclusively" test is the gate — anything that's also for personal use needs to be apportioned (e.g. your mobile phone if 60% business / 40% personal).

Simplified expenses (the easy mode)

HMRC offers flat-rate "simplified expenses" for three categories — easier than tracking actual costs:

• Mileage: 45p/mile for first 10,000 business miles, 25p after. Covers fuel, insurance, depreciation, servicing. You can't also claim actual car costs if you use this.
• Working from home: £10/month (25-50 hours), £18/month (51-100 hours), £26/month (101+ hours). No receipts needed.
• Living in your business premises: flat-rate deduction depending on people in the property.

For most sole traders working from home a few days a week, simplified expenses are the obvious choice — they save the hassle of apportioning your home utilities by floor area.

Working from home — the apportionment method

If simplified expenses don't suit (you work from home full-time and your actual costs exceed £312/year), you can apportion actual costs. The method:

1. Identify total annual household costs: rent/mortgage interest, utilities, council tax, insurance, repairs, broadband.
2. Calculate the "business proportion" of your home — typically rooms × hours used method. If you use 1 of 6 rooms for 40 hours a week for business, business proportion = (1/6) × (40/168) = 4% of household costs.
3. Multiply household costs by business proportion to get the deductible amount.

For full-time freelancers, this can run £1,000-£2,500/year in legitimate deductions. The simplified rate only delivers £312/year (£26 × 12). Worth doing the apportionment if you're seriously working from home.

The most-missed UK self-employed allowances

1. Pension contributions. Self-employed people get tax relief on personal pension contributions up to the higher of £3,600 or 100% of earnings (capped at £60,000 annual allowance). Most sole traders dramatically under-contribute. £5,000/year into a SIPP saves £1,000-£2,000 in income tax.
2. Use of home (proper apportionment). Most sole traders use simplified expenses (~£312/year). Real apportionment often delivers £1,000-£2,500/year. Worth 15 minutes' work.
3. Mobile phone (business portion). If your phone contract is mostly for business, the business portion is fully deductible. Most sole traders don't claim this.
4. Marriage allowance. 2.4 million UK couples don't claim it. Worth £252/year backdated 4 years = £1,000+.
5. Pre-trading expenses. Costs incurred in the 7 years before you started trading (e.g. equipment bought before you registered) are deductible against your first year's profit. Often missed entirely.
6. Bank interest on business borrowing. Interest on credit card debt, overdrafts, and loans used for business purposes is deductible. Easy to forget.
7. Subscription to professional bodies. Membership fees for your trade body (e.g. BACP for therapists, IT Pro for engineers, ICAEW for accountants) are fully deductible.
8. Trade-specific tools and equipment. Anything under £150 can be deducted as an expense in the year. Over £150, use the Annual Investment Allowance (up to £1M).

Take Home runs through this list against your actual accounting data and flags every legitimate deduction you've not yet claimed. The average user has £500-£2,500 of un-claimed expenses sitting in their books.