What tax do I pay as a freelancer?

Being a freelancer can give you more freedom and can often mean youll have the ability to earn more money. However, its important to understand what tax youll pay as a freelancer. The tax you pay will depend on your employment status.

In this blog, well look at the different types of tax you need to consider.

Freelance tax employment status

If you’re employed full-time but freelance on the side, then you may be taxed in addition to your PAYE taxes and youll have to submit a self-assessment tax return. If you earn up to £1,000 per year from your freelance activity, this is tax-free under the Trading Allowance.

Your income tax will be calculated on your total earnings i.e. your combined income from employment and freelance profits.

If you’re a full-time freelancer and you operate as a sole trader or become a director of a limited company, then you’ll have to complete a tax return to calculate the tax you pay on your income.

Freelancer income tax rates for 2022/23

The tax year runs from 6th April and the Income Tax Rates for the 2022/23 tax year are as follows:

• Your personal allowance (the amount you can earn before you pay tax is £12,570.
• Basic rate (20%) tax is due on income up to £37,700.
• Higher rate (40%) is due on income from £37,701-£150,000.
• Additional rate (45%) is due on income of over £150,000.

If youre freelancing as well as being employed, youll need to disclose the tax already paid on your earnings from your employer on your self-assessment tax return. HMRC will work out the amount of tax due on your profits from freelancing. If the profits you earn from freelancing push your total earnings into a higher rate tax band, youll need to pay the higher rate tax.

Sole trader or limited company?

As a self-employed freelance, you have a choice on the business structure you choose to trade under. You can choose to operate as a sole trader or a limited company.

If you trade as a sole trader then there is no legal separation between you and your business. You will be personally liable for all activities of the business, including any debts.

If you trade as a limited company, you create a separate legal entity and you have no personal liability. However, you’ll have additional statutory and legal responsibilities to consider and trading as a limited company will have different tax implications.

Find out more about the difference between being a sole trader or limited company here.

Freelance business structure

Most freelancers register as sole traders to begin with. If youre trading as a sole trader with no other income from other employment, you will need to file a self-assessment tax return. HMRC will then calculate the income tax you need to pay based on your profits / revenue you earn as a freelancer.

Your profit / revenue is calculated by taking your total income minus any allowable expenses you have incurred in running the business. More details about business expenses are below.

What about expenses?

As a sole trader you can offset your business expenses against your income. You’re only taxed on your self-employed profits.

If you trade as a limited company, the tax rules are different as youll pay Corporation Tax on company profits, which are calculated after allowable expenses.

Whether you’re a full-time freelance or you freelance on the side, there are expenses that you can claim that will reduce your tax bill.

Keep track of your expenses and hold on to all your receipts so that you have evidence to offset your expenses against your income.

Here are a few examples of what you can deduct:

• Equipment such as computers, accessories etc.
• Office furniture.
• A portion of your costs incurred working from home, such as utility bills (that account for business use).
• Travel costs (for client meetings etc.)
• Software and licences.
• Marketing costs.
• Insurance & professional fees.

You must always remember that allowable expenses must be incurred “wholly and exclusively” for the purpose of running the business.

You can find out more here about sole trader and limited company expenses.

National Insurance for freelancers

If youre freelancing, you may need to make National Insurance contributions on your profits when you earn above a certain amount.

The benefit of paying National Insurance contributions whilst freelancing is that it entitles you to the state pension and other benefits later in life. Youll have to accrue a certain number, of years of National Insurance contributions to qualify for these benefits.

In September 2021, the government announced plans to introduce a health and social care levy of 1.25 percentage that will be added to National Insurance contributions from April 2022.

What you pay depends on how you work and how much you earn.

• Class 1 NIC: paid on employment earnings which come out of your wage before you get paid.
• Class 2 and 4: paid on self-employed profits, usually through self-assessment but check because this doesn’t apply in every case.
• Class 2: if profits are £6,475 or more a year.

plus

• Class 4: if profits are £9,501 or more a year
• Class 3: voluntary payments for times when you haven’t needed to pay, perhaps because your income was too low, but you want to maintain a full NIC record.

You can read more detail about National Insurance here.

Registering for VAT

If your annual turnover is more than £85,000 then you are required to register for VAT. You can voluntarily register for VAT, even if your earnings are beneath this threshold.

You can register in your name as a sole trader or in the company name if youre trading as a limited company.

Find out more about our VAT registration service here.

What to do as a new freelancer

1. Register as self-employed with HMRC

• You need to tell HMRC that you are self-employed by registering for self-assessment on the HMRC website.
• Take notes of key dates, you have until October 5 after the end of the tax year during which you went freelance to register or there could be penalties to pay. NOTE: the financial year starts on April 6, so if you become self-employed in February, you have eight months to register.
• Youll receive a letter from HMRC within 10 days containing your 10-digit unique taxpayer reference (UTR) number. You will need this when it comes to pay tax or contact HMRC.
• HMRC will set up your self-assessment account online.

Paying tax from freelancing

You need to fill out your self-assessment tax return for the previous tax year by October 31 if you do it by post, or online by January 31. You also need to pay you tax bill by January 31.

HMRC will then calculate the income tax you need to pay.

HMRC will sign you up for “payments on account”. This helps freelancers spread the tax burden by giving you the ability to pay twice a year in advance to cover the current financial year’s likely tax bill

If you reckon you’ll earn a lot less than the estimate, you can apply to HMRC to reduce your payments on account.

If youre thinking of becoming a freelancer, then you need to know your tax responsibilities. Its crucial you dont miss deadlines and know when to register as self-employed as well as understanding whether to freelance as a sole trader or a limited company.

It can be daunting and complicated when you begin to do freelance work, so if you need more help and advice on freelance tax or any other help with becoming a freelancer, then contact our experts here as dns accountants today. You can book a free consultation or call us on 03300 886 686 or email enquiry@dnsaccountants.co.uk.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.