Understanding Your Tax Obligations as a Freelancer

If you’re working as a freelancer on the side, you may be wondering what tax you should pay. It’s important to understand your tax obligations as a freelancer in the UK to avoid any penalties or fines. In this article, we’ll cover the basics of what you need to know about paying taxes as a freelance worker in the UK.

As a freelancer, you are responsible for paying your own taxes. This means that you will need to register with HM Revenue and Customs (HMRC) and file a self-assessment tax return each year. The amount of tax you pay will depend on your earnings, expenses, and other factors. It’s important to keep accurate records of your income and expenses throughout the year to make filing your tax return easier.

In this article, we’ll go over the different types of taxes you may need to pay as a freelancer, including income tax and national insurance contributions. We’ll also cover the tax-free allowances that are available to you and provide tips on how to stay on top of your tax obligations. By the end of this article, you’ll have a better understanding of what tax you should be paying as a freelancer on the side.

Understanding Your Employment Status

As a freelance worker, it’s important to understand your employment status to determine the tax you need to pay. There are differences between being employed and being self-employed, and it’s crucial to know where you stand to avoid any legal or financial issues.

Differences Between Employed and Self-Employed

Employed individuals work under a contract, receiving a fixed salary with income tax and National Insurance contributions deducted by their employer. Conversely, self-employed individuals, or freelancers, are responsible for managing their taxes and must register with HMRC for a Self Assessment tax return each year.

Defining Freelance Work

Freelance work is a type of self-employment where you work on a project-by-project basis for different clients. It can be a side hustle to earn extra money or a full-time freelance career. Freelance work can include any skills or hobbies you have, such as writing, web design, or photography.

To determine whether you’re a freelancer, consider the nature of your work. If you have a regular job and do some work on the side to earn extra money, you may not be considered a freelancer. However, if you have a freelance career and work for multiple clients, you’re likely to be classified as self-employed.

Freelance Tax Responsibilities in the UK

If you are a freelancer working on the side, you need to be aware of your tax responsibilities. Here are the key tax considerations that you should keep in mind:

Registering for Self-Assessment

As a freelancer, you need to register for self-assessment with HM Revenue and Customs (HMRC) if you earn more than £1,000 from self-employment in a tax year. You can register online on the HMRC website and obtain your unique taxpayer reference (UTR) number.

National Insurance Contributions for Freelancers

Freelancers pay two types of National Insurance Contributions: Class 2 and Class 4. Understanding these contributions is crucial for calculating your tax liabilities accurately.

Class 2 NICs are paid at a flat rate of £3.05 per week if your profits are £6,515 or more per year. Class 4 NICs are paid as a percentage of your profits. The current rate is 9% on profits between £9,568 and £50,270, and 2% on profits over £50,270.

Income Tax for Freelancers

Income tax is payable on your profits, with rates varying by income levels. The current personal allowance and income tax rates are detailed in our guide on Tax Rates and Allowances 2024.

For the tax year 2023-2024, the personal allowance is £15,000, which means you don’t pay any income tax on the first £15,000 of your taxable income. The basic rate of income tax is 20% on taxable income between £15,001 and £50,270, and the higher rate is 40% on taxable income between £50,271 and £150,000. The additional rate is 45% on taxable income over £150,000.

VAT Considerations

Freelancers with an annual turnover exceeding £85,000 must register for VAT. Our article on whether you should register for VAT provides detailed guidance on this subject.

You can register voluntarily if your turnover is below this threshold. Once registered, you must charge VAT on your sales and pay VAT on your purchases. You can claim back the VAT you pay on your purchases as input tax.

You can deduct allowable expenses from your income to reduce your tax liability. However, you must ensure that the expenses you claim are wholly and exclusively for business purposes. If you make a mistake on your self-assessment tax return, you may be fined, so it’s important to take care when completing your tax return.

Key Tax Forms and Deadlines

As a freelancer on the side, it is essential to stay on top of your tax obligations. This means knowing which forms to fill in and when to submit them. In this section, we’ll cover the key tax forms and deadlines you need to be aware of.

Self-Assessment Tax Return

If you’re a freelancer on the side, you’ll need to fill in a Self-Assessment Tax Return each year. This form allows you to declare your taxable income and calculate your tax liability. You can submit your Self-Assessment Tax Return online or by post, but the deadline for submitting paper returns is earlier than for online returns.

For the tax year 2023/24, the deadline for submitting paper returns is 31 October 2024, while the deadline for submitting online returns is 31 January 2025. If you miss the deadline, you’ll face penalties and interest charges.

Payment on Account

If you’re a freelancer on the side, you may also need to make Payments on Account. These are advance payments towards your tax bill for the following year. You’ll need to make two Payments on Account each year, with the first due on 31 January and the second due on 31 July.

The amount you need to pay is based on your tax liability for the previous year. If your tax liability for the current year is higher than the previous year, you’ll need to make an additional payment by 31 January following the end of the tax year.

You can find more information about Self-Assessment Tax Returns and Payments on Account on the HMRC website. Make sure you have your Unique Taxpayer Reference (UTR) to hand when filling in your tax forms.

Allowable Expenses and Deductions

Understanding which expenses are allowable can significantly reduce your tax bill. Expenses must be solely for business purposes, and it’s vital to keep supporting records. For more details on what expenses you can claim, see our guide on what business expenses can a sole trader claim.

However, not all expenses are allowable, and you need to keep accurate records to support your claims.

Identifying Allowable Expenses

Allowable expenses are expenses that you incur wholly and exclusively for the purpose of your business. They include expenses such as office rent, equipment, travel expenses, and professional fees. You can also claim for the cost of goods that you sell, as well as the cost of raw materials and stock.

It’s important to note that you cannot claim expenses that are not related to your business, such as personal expenses or expenses that are not necessary for your business. For example, you cannot claim for your personal phone bill, even if you use your phone for business purposes.

Calculating Deductions

Once you have identified your allowable expenses, you can deduct them from your taxable income to arrive at your taxable profit. This is the amount on which you will pay tax. For example, if your income for the year is £30,000 and your allowable expenses are £5,000, your taxable profit will be £25,000.

You can also claim capital allowances for certain types of assets, such as equipment and machinery. Capital allowances allow you to deduct the cost of the asset from your taxable income over a number of years.

Planning for Tax as a Freelancer

Planning for tax can be a daunting task, but it is essential to ensure that you stay on top of your finances and avoid any penalties or fines. In this section, we will cover some key aspects of planning for tax as a freelancer.

Keeping Accurate Records

One of the most important aspects of planning for tax as a freelancer is keeping accurate records. This includes keeping track of all your income and expenses, as well as any receipts or invoices. By keeping accurate records, you can ensure that you are claiming all the expenses you are entitled to and that you are paying the correct amount of tax.

Understanding Tax Bands and Rates

It is essential to understand the tax bands and rates that apply to you as a freelancer. In the UK, there are different tax bands depending on your income. The basic rate is 20% and applies to income up to £50,000. Above this, you will pay the higher rate of 40% on income up to £150,000. Scottish residents have different tax bands and rates.

Avoiding Penalties and Fines

Failing to pay your taxes on time or submitting an incorrect tax return can result in penalties and fines. To avoid this, make sure you submit your tax return by the deadline and pay any tax owed on time. If you are unsure about any aspect of your tax return, seek advice from a qualified accountant.

Business Structures for Freelancers

If you’re a freelancer, you have several options when it comes to structuring your business. The most common business structures for freelancers in the UK are sole trader and limited company. Each structure has its own advantages and disadvantages, and you should choose the one that best fits your needs.

Sole Trader vs Limited Company

As a sole trader, you are self-employed and personally responsible for managing your business. This is the simplest and most common business structure for freelancers in the UK. You have complete control over your business, from setting your rates to choosing your clients. However, you are also personally liable for any debts your business incurs.

On the other hand, a limited company is a separate legal entity from you as an individual. This means that your personal assets are protected if your business incurs debts. However, setting up and running a limited company can be more complex and expensive than being a sole trader.

Corporation Tax for Limited Companies

If you choose to set up a limited company, you will be subject to corporation tax. Corporation tax is a tax on the profits of your limited company. The current corporation tax rate for small businesses in the UK is 19%. You will need to file a corporation tax return with HM Revenue & Customs (HMRC) every year.

It’s important to note that if you are self-employed as a sole trader, you do not pay corporation tax. Instead, you pay income tax on your profits.

Choosing between operating as a sole trader or a limited company has significant implications for your tax obligations and personal liability. Our comparison of Sole Trader vs Limited Company vs Umbrella Company provides insights to help you decide the best structure for your freelancing business.