Freelancing and contracting can be a rewarding way to take control of your work and shape your career on your own terms. According to the Office for National Statistics (ONS), more than four million people in the UK are self-employed. Many fall under the freelancer or contractor label, and they often face similar questions about tax obligations and optimising earnings. In this post, we will look at practical ways to structure your affairs for the 2025/26 tax year and beyond.
Understand your tax obligations
Whether you operate as a sole trader or manage your services through a limited company, it’s important to know where you stand with income tax, National Insurance, and other liabilities. For the 2025/26 tax year, the current income tax bands in England, Wales, and Northern Ireland are still expected to be: • Personal Allowance (0%): £0 – £12,570
• Basic rate (20%): £12,571 – £50,270
• Higher rate (40%): £50,271 – £125,140
• Additional rate (45%): Above £125,140
These thresholds have been frozen in recent years and may remain the same until 2028, although official updates can be found on HMRC’s official website.
If you’re self-employed, you’ll also pay Class 2 and Class 4 National Insurance contributions (NICs). Class 2 NICs remain a small weekly amount, while Class 4 NICs are a percentage of your annual profits. For exact figures, check the HMRC self-employed NICs guidance.
Make the most of allowable expenses
Freelancers and contractors can reduce their taxable profits by claiming all legitimate expenses. This may include software licences, subscription fees, certain travel expenses, and a share of home-working costs if you operate from a home office. The HMRC rule is that expenses must be “wholly and exclusively” for your business, so keep detailed records and separate them from any personal spending.
Consider your VAT position
If your turnover is likely to exceed £90,000 in a rolling 12-month period, you must register for VAT. Even if you’re under the threshold, you might opt for voluntary registration if it benefits your cashflow or your clients expect to deal with VAT-registered suppliers. For smaller operations, the VAT Flat Rate Scheme can sometimes simplify reporting and offer some savings, but it’s wise to check whether it’s suitable for your circumstances.
Check if the Construction Industry Scheme applies
Many contractors and freelancers work in construction, and that brings the Construction Industry Scheme (CIS) into play. Under CIS, contractors deduct money from a subcontractor’s payments and pass it on to HMRC. If you’re a subcontractor, the deductions count towards your tax and NIC. You should register for CIS if you’re a contractor or subcontractor, as it ensures correct payments and avoids higher deduction rates. The official CIS guidance explains registration, rates, and deductions.
Evaluate whether to operate as a limited company
Some freelancers and contractors find it more tax-efficient to operate through a limited company. Corporation tax rates rose to a main rate of 25% from April 2023, but not every business pays this rate. If your annual profits are below £50,000, you could pay a lower rate. For profits between £50,000 and £250,000, a tapered rate applies. In many instances, drawing a combination of salary and dividends from your limited company can still bring tax advantages compared to paying solely through self assessment, especially if your total income stays within the basic rate band for dividends.
Take advantage of pension contributions
Putting money into a pension can be an effective way to manage your tax bill. If you’re a sole trader, contributions to a personal pension scheme can reduce your self assessment bill. If you operate as a limited company, employer pension contributions are generally deductible expenses for corporation tax. This reduces the company’s taxable profits and can help you build a retirement fund without facing higher rate income tax today.
Stay on top of IR35 rules
IR35 legislation aims to ensure that if individuals work in a similar way to employees, they pay tax as employees do, no matter what their contract says. If HMRC decides you’re effectively an employee rather than a contractor, you may have to pay income tax and NICs as if you’re on payroll. Keep clear records of your working arrangements, ensure you have multiple clients (where possible), and make certain your contract reflects genuine self-employment. If you’re in doubt, use HMRC’s Check Employment Status for Tax tool for guidance.
Keep an eye on deadlines
It’s easy to focus on getting work done and forget about tax returns. Missing deadlines can lead to penalties, so mark key dates on your calendar. If you’re operating through a limited company, remember you must file annual accounts with Companies House and your corporation tax return with HMRC. Sole traders need to submit their self assessment returns by 31 January for online filing. In the 2025/26 tax year, the prompt submission of digital tax accounts could matter even more as Making Tax Digital continues to expand to more taxpayers.
Build a safety net for your tax bills
Set aside some of your earnings as you go, so you don’t struggle to pay a large bill in January or July. Opening a dedicated savings account for tax can help you ring-fence that money. Some of our clients at Stapletons find it useful to put aside a fixed percentage of each invoice to stay on track.
Plan your cashflow with care
Cashflow can make or break a small business. Getting paid on time, setting aside money for taxes, and understanding your expenses can help you keep things running smoothly. If you’re worried about cashflow, consider whether you can charge a deposit upfront or move to a monthly retainer model for regular clients. If you need more tailored advice on managing the ups and downs, Stapletons Accountants can help.
Think about your long-term financial health
Self-employment comes with freedom but also with extra financial responsibilities. By staying organised and using every legitimate tax break, you can keep more of your earnings. This includes tracking potential changes in personal allowances, staying aware of IR35 developments, and reviewing your business structure. If you’re uncertain, we’re always happy to offer guidance that suits your personal goals and business needs. Have a look at our blog page for more tips.
The bottom line
The 2025/26 tax year presents plenty of opportunities for freelancers and contractors to arrange their finances and meet all compliance requirements. Pay attention to allowances, stay updated on tax rules, and don’t overlook the advantages of organising your business structure in a way that best suits your circumstances. If you want expert advice, speak to us. We can work side by side with you to support your plans and goals.
If you have questions or you’d like us to review your tax setup, get in touch with Stapletons. We’re here to lend a hand and help you succeed.
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