Freelance and Self-Employed Taxes in the UK (A to Z Guide)

What’s not to love about freelancing? You get to be your own boss and work on what you are most passionate about. The freedoms are extensive, including deciding when to work, which facilitates the work-life balance that the modern population craves. Today, there are diverse opportunities for anyone looking to be their own boss, full- or part-time.

Taxes are inevitable in the UK, as in almost every country globally. Therefore, you shouldn’t view the freelancer tax as an extra burden but rather an additional government revenue stream that helps improve the economy. Despite this view, understanding freelance tax in the UK can be challenging, making your self-employment endeavors feel much more complicated. Don't worry; we’ve got you covered with all the basics below.

The Taxation System for Freelancers in the UK

You work for yourself as a freelancer and are classified as a sole trader. As such, you must register with HM Revenue and Customs (HMRC). The tax system for freelancers lets you register and do your taxes online. Nonetheless, you must be diligent to ensure you do it accurately and don’t miss any deadlines.

When registering, HMRC will send you a 10-digit Unique Taxpayer Reference (UTR). You will also receive a code after completing the online registration, usually in 10 days. You can now set up an online self-assessment with UTR and the code. You fill out the self-assessment form for the previous tax year. If you do it by post, you need to complete it by October 31 and January 31 if you do it online. The tax bill should also be settled by January 31st.

That’s the basic taxation system, but how do you know if you should pay taxes as a freelancer? Below is a quick breakdown of what freelance tax in the UK entails.

UK Taxation of Self-Employed Individuals

The freelancer taxation system in the UK can be overwhelming for most. Nonetheless, you should understand the basics as an intelligent business person. As you navigate the UK's self-employed taxes, here are the basics you should understand:

Income Tax

In the UK, tax on freelancers is derived from their profits, which must be at least £12,500. The income tax is total earnings minus all the allowable business expenses. You also have personal allowances set at £12,570. This means the first £12,570 profits are not taxed.

Tax Bands

Three primary bands are used to determine tax for freelancers in the UK. The basic rate is 20% on earnings from £12,570 to £50,270. Freelancers earning from £50,271 – £125,140 pay a higher rate set at 40%. If you earn £125,141 or more, your self-employment tax rate falls under the third band set at 45%.

These tax bands are determined by employment and freelancing earnings. Therefore, if the total earned from employed work and freelancing pushes you from the basic rate to the higher rate, your tax obligation will be calculated at 40%, not 20%.

National Insurance Contributions (NICs)

Like their employed counterparts, freelancers need to contribute to NICs funds. This makes you eligible for state benefits and pension, which is crucial as you strive to secure your financial future. When calculating taxes as a freelancer, it’s wise to account for NICs, which fall under:

• Class 2 for profits above £6,725
• Class 4 for profits of more than £12,570 a year.

You could also contribute to Class 3, such as when the income is below the threshold, but you still want to maintain a full NIC record.

Value Added Tax (VAT)

If your turnover exceeds £85,000 annually, you need to register for VAT. This means you’ll start charging VAT on your sales, which you pay to HMRC.

Tax Deductions for Freelancers

It costs money to make money, a concept that the tax authorities acknowledge. That is why there are allowable deductions in freelancing and taxes. You can’t go about deducting any expense from your income and deeming it a deductible.

Allowable deductions are expenses that are wholly and exclusively associated with your freelancing endeavors. Such expenses include marketing, office supplies, insurance, staff salaries, travel expenses, equipment, and training courses, to name a few. These tax deductions ensure that you only pay freelance tax on the profit earned, not all the income.

Understanding the Process of Paying Taxes as a Freelancer in the UK

After registering as self-employed with HMRC, paying freelance tax UK takes a few steps, the standard including:

• Know the taxes: As mentioned earlier, as a freelancer, you pay income tax and NICs, which are based on your total income minus allowable expenses.
• Complete self-assessment tax returns: This is done annually, with the deadline set at 31st January after the end of the tax year, which runs from 6th April to the following 5th April.
• Calculate tax owed: You calculate the tax owed per the profit and tax band and also determine the NICs contribution amount. You then submit the amount, which must be done by the 31st January deadline.

Considering your busy freelancing schedule, the process seems straightforward, but you can quickly lose track. A quick way to facilitate smooth progress is to ensure you keep accurate and up-to-date financial records. Documents such as invoices, receipts, and bank statements allow you to easily fill out the forms and accurately calculate the freelance tax and NICs.

Leveraging Smart Tax Services for 100% Compliance

While freelancing offers notable freedoms, it can be scary for some. The thought of doing something on your own is risky, which many avoid. For the brave ones, self-employment can be quite rewarding.

Understanding and keeping up with freelance tax UK regulations can be complex and more of a full-time job. That is why many freelancers opt to enlist professional tax assistance services.

Smart tax services like Ruul take the heavy lifting off your shoulders. The professionals ensure you maintain 100% tax compliance without shifting your focus from your core functions. You will easily track income and expenses, calculate freelance tax, and remit it before the deadlines. This is all while remaining focused on your operations, making it easier to deliver the best to your clients and grow your freelancing business.