Am I legally allowed to offset the tax I pay on freelance work? (UK)
Yes, you can deduct from your taxable profits (almost) any expenses incurred in the course of your business. See here for HMRC's detailed advice on the subject. The fact that you have salaried PAYE employment as well makes no difference.
It is a great advice.  I would suggest going to the Companies House (it's in London somewhere), picking up all of their leaflets regarding requirements for different forms of corporate entity, and deciding if you want to have that burden.  It is not a lot of work, you can essentially claim VAT on all business purchases (the way roughly it works, is that your company invoices your client, your client has to pay the fee + VAT (usually that VAT is then deducted by your client from it's VAT, so no loss there), and you pay the VAT on the difference between the service sales price, and your costs (computers etc.) ) You have to be careful to avoid excessive double taxation (paying income tax on both corporate income, and then your personal income off said company), but it usually comes off in your favor. Essentially, if you're making more than 50% of your income from services rendered, it is to your advantage to render such services as a business entity. "In the US, you'd run the risk of being accused of fraud if this weren't set up properly.  It would only be proper if your wife could show that she were involved, acting as your agent, bookkeeper, etc. Even so, to suggest that your time is billed at one rate but you are only paid a tiny fraction of that is still a high risk alert.  I believe the expression ""if it quacks like a duck..."" is pretty universal. If not, I'll edit in a clarification.  note -I know OP is in UK, but I imagine tax collection is pretty similar in this regard." Yes if you do it as a hobby, as it's still income. But it should be something you can offset against tax Either way, you shouldn't be doing this as you, you should either register as self employed or create a company. You register this income as self-employed income (or income of the company) and offset the expenses of running the server against tax. In the UK, companies (or self employed people, which are basically companies) pay tax on profit not income (unless VAT applies, in which case they're basically just passing the VAT on for their customers). Since you're not making a profit over the whole year (even if some months are profitable) you will pay no tax. The company will have to pay 20% tax on its profits. Doesn't matter how these profits are earned. Profits = Income minus all money you spend to get the income.  However, you can't just take the profits out of the company. The company can pay you a salary, on which income tax, national insurance, and employer's national insurance have to be paid at the usual rate. The company can pay you a dividend, on which tax has to be paid. And the company can pay money into the director's pension fund, which is tax free.  Since the amount of company revenue can be of interest, I'd be curious myself what the revenue of such a company would be. And if the company makes losses, I'm sure HMRC won't allow you to get any tax advantages from such losses. In a simple case as the sole UK resident director/shareholder of a company, with that company as your only income, you are usually best paying yourself a salary of the maximum tax free amount allowed under your tax code (~£11k for most people at present).  On this you will have to pay some employer and employee National Insurance (NI) contributions (totalling around £1000). Your salary/employer NI counts as an expense, so that is taken off the company profits.  You then pay corporation tax on the remainder (20%).  The first £5k you take as dividends is tax free, the remainder at a lower tax rate than the equivalent combined income tax/NI (starting at 7.5% instead of 20% tax plus employee plus employer NI), giving a significant saving compared to salaried income even after corporation tax. To declare and pay the tax, you would need to complete a self-assessment tax return.  Your company will also need to file a return. The Contractor UK website, although aimed at IT contractors, has some very useful information on operating Ltd companies. That said, finances are rarely that simple so I would concur with the recommendation you engage an accountant, which is a tax-deductible expense. "Your comment to James is telling and can help us lead you in the right direction: My work and lifestyle will be the same either way, as I said.   This is all about how it goes ""on the books.""    [emphasis mine] As an independent consultant myself, when I hear something like ""the work will be the same either way"", I think: ""Here thar be dragons!"".  Let me explain: If you go the independent contractor route, then you better act like one.  The IRS (and the CRA, for Canadians) doesn't take lightly to people claiming to be independent contractors when they operate in fact like employees. Since you're not going to be behaving any different whether you are an employee or a contractor, (and assuming you'll be acting more like an employee, i.e. exclusive, etc.), then the IRS may later make a determination that you are in fact an employee, even if you choose to go ""on the books"" as an independent contractor. If that happens, then you may find yourself retroactively denied many tax benefits you'd have claimed; and owe penalties and interest too.  Furthermore, your employer may be liable for additional withholding taxes, benefits, etc. after such a finding. So for those reasons, you should consider being an employee.  You will avoid the potential headache I outlined above, as well as the additional paperwork etc. of being a contractor. If on the other hand you had said you wanted to maintain some flexibility to moonlight with other clients, build your own product on the side, choose what projects you work on (or don't), maybe hire subcontractors, etc. then I'd have supported the independent contractor idea.  But, just on the basis of the tax characteristics only I'd say forget about it. On the financial side, I can tell you that I wouldn't have become a consultant if not for the ability to make more money in gross terms (i.e. before tax and expenses.)  That is: your top line revenues ought to be higher in order to be able to offset many of the additional expenses you'd incur as an independent.  IMHO, the tax benefits alone  wouldn't make up for the difference. One final thing to look at is Form SS-8 mentioned at the IRS link below.  If you're not sure what status to choose, the IRS can actually help you.  But be prepared to wait... and wait...  :-/ Additional Resources:" I am a freelancer based in Europe and I want to tell you: - if you are a freelancer, then you INVOICE your Swizzerland based client The word salary is improper. - So your client will DEDUCE the invoice from its taxes, and NOT pay income tax on top of that invoice. Because invoice = expense.  So, ONLY YOU pay income tax in India. Your client pays no tax at all, not in India, not in Swizzerland. As you are a freelancer and not employee, the company has no obligation to pay employer taxes for you. A company  has financial benefits from working with a freelancer. Yes, you do. Depending on your country's laws and regulations, since you're not an employee but a self employed, you're likely to be required to file some kind of a tax return with your country's tax authority, and pay the income taxes on the money you earn. You'll have to tell us more about the situation, at least let us know what country you're in, for more information. If you are still a UK resident, then yes. Also, as I understand it, if the contract is only for a year, then unless it happens to exactly match the payroll year, you will have to remain a UK resident and hence, yes you will have to pay tax. See here for more info (from HMRC FAQ questions) There is no tax code I know that would grant you such a privilege. And it just isn't practicable. In your examples, you always sold your product and were thus able, in retrospect, to give a value to your work. What if you don't sell your product? What if in one case your worked hour is reimbursed with one price, with the next product at another (i.e. difference in margin)? No, it won't work like that.  And by the way, I think you might have got some definitions upside down. What you want is a salary that your own company pays out to yourself and you can deduct from other profits. But as long as you can't afford to pay yourself a salary, and you don't have access to investors who are willing to front you the money, the time invested is your personal investment and cannot be deducted anywhere - though it might pay off nicely in the long run. That's the risk entrepreneurs take. "I think the £35K band applies to the ""dividend income"" not the ""dividend paid to you"", and so you would only actually get £31.5K (90% of £35K) in your pocket before the next tax band kicked in. If your company will only supplying large VAT registered entities, then register for VAT yourself and elect the Flat Rate scheme - depending on your area of business, given that you have no expenses, your company will get an extra 7% - 14% on its income for free. Your clients won't care that you charge them VAT because they'll claim it back. Finally, depending on what your company is for, beware of the dreaded IR35" Yes, but make sure you issue a 1099 to these freelancers by 1/31/2016 or you may forfeit your ability to claim the expenses. You will probably need to collect a W-9 from each freelancer but also check with oDesk as they may have the necessary paperwork already in place for this exact reason.  Most importantly, consult with a trusted CPA to ensure you are completing all necessary forms correctly and following current IRS rules and regulations.  PS - I do this myself for my own business and it's quite simple and straight forward. "As you clarified in the comments, it is not a contract work but rather an additional temporary assignment with the same employer. You were paid for it in form of a ""bonus"" - one time irregular payment, instead of regular periodic payments. Irregular wage payments fall under the flat rate withholding rule (the 25% for Federal, some States have similar rules for State withholding). This is not taxes, this is withholding. Withholding is money the employer takes from your salary and forwards to the IRS on the account of your tax liability, but it is not in itself your tax liability. When you do your annual tax return, you'll calculate the actual tax you were supposed to pay, and the difference between what was withheld and your actual tax will be refunded to you (or owed by you, if not enough was withheld). You can control the regular pay withholding using W4 form." The finance team from your company should be able to advise you. From what I understand you are Indian Citizen for Tax purposes. Any income you receive globally is taxable in India. In this specific case you are still having a Employee relationship with your employer and as such the place of work does not matter. You are still liable to pay tax in India on the salary. If you are out of India for more than 182 days, you can be considered as Non-Resident from tax point of view. However this clause would not be of any benefit to you as are having a Employee / Employer relationship and being paid in India. Edit: This is only about the India portion of taxes. There maybe a UK protion of it as well, plus legally can you work and your type of Visa in UK may have a bearing on the answer I love the flat rate VAT scheme. It's where you pay a percentage based on your industry. An example might be Computer repair services, where you'll pay 10.5% of your total revenue to the HMRC. But you'll be invoicing for VAT at 20% still. Would definitely recommend registering for it since you're expecting to cross the threshold anyway. And like DumbCoder said, you also get a first year discount of 1%, so in the example above, you'd end up paying 9.5% VAT on your turnover. I personally found it a pain to invoice without VAT (my clients expected it), so registering made sense regardless of the fact I was over threshold. The tricky bit is keeping under the £150k turnover so you stay eligible for the flat rate. It does get more complex otherwise.