How to pay taxes as a freelancer

One of the most daunting aspects of becoming a freelancer is getting your head around your taxes. Here we explain what you have to pay and when.

Working for yourself can offer many benefits, such as greater flexibility, pay and creativity. But most self employed people are not accountants.

Get your finances wrong and there could be penalties to pay, but tax doesn’t need to be so taxing.

In this article, we explain:

• What are the different types of freelancer you can be?
• What to do I need to do as a new freelancer?
• What will I need to pay in tax and national insurance?
• What can I expense as a freelancer?
• What are payments on account?

Read more: UK tax codes and what they mean

What types of freelancer can you be?

You can decide to commit to being self-employed full time, or freelance as your bit on the side. However, a more complicated issue is whether you intend to be a sole trader, or set up as a limited company.

1. Sole trader

This is the more popular option, accounting for 60% of all small businesses in the UK.

• PROS:
  • More straightforward than setting up as a limited company
  • Cheaper for you

• CONS:
  • Should your business fail, you are on the hook for any debts, meaning you could lose your home

2. Limited company

A limited company is considered its own entity, and you, as a director, its employee.

• PROS:
  • As an employee you are not responsible for company debt and your personal property is not at risk
  • You can legitimately pay less personal tax than a sole trader
  • Employees’ executive pensions can be funded as a legitimate business expense

• CONS:
  • You have two sets of tax issues to get your head around: personal tax and your business’s tax
  • You will need to be aware of IR35 legislation if you provide your services through a limited company
  • More complicated than you setting up as a sole trader

Which path you choose has to be right for you, so do your homework and take your time over it.

In this article we will be focusing on sole traders. 

If you are thinking of starting your own business, but aren’t sure how to go about it, check out our guide here.

What to do as a new freelancer

There are a number of steps that you need to take if you have just become self-employed. We’ve outlined them below:

1. Fill out HMRC’s self-assessment form

• Tell the taxman – registering for self-assessment on the HMRC website lets the taxman know you are self-employed
• Watch out for the deadline – 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.
• Your UTR – a letter should arrive within 10 days containing your 10-digit unique taxpayer reference (UTR) number. You will need this when it comes to paying tax.
• Online account – HMRC will set up your online self-assessment account so you are ready to file your tax return when the time comes.

2. Register for VAT

• While you are at it – at the same time you can also register for VAT. Value added tax is paid by consumers on most, though not all, goods and services, and is currently set at 20% in the UK.
• Your turnover – if it is over £85,000 in a tax year, then you have to register with HMRC. If you make less, it’s voluntary
• Confirmation – you will be sent a certificate confirming your VAT number and key dates for when you need to submit your first return and payment
• Allow plenty of time – it could take up to a month to receive your certificate, during which time you can’t charge or show VAT on your invoice. You will still have to pay it to the taxman.
• Let your customers know – you will be charging more during this time to cover the tax and will reissue them with invoices once you have your VAT number.

Even if you don’t have to register for VAT, it can still be a good idea:

• Adds credibility and professionalism
• Offers more secrecy around your earnings

You are also able to reclaim VAT on goods and services your business buys, including some from the past four years that you are still using. It will of course add to your clients’ bill (though often they too can claim it back).

It is important that you keep accurate records and usually need to submit a return every three months, so there’s more admin for you.

Read more about small business tax and what you need to pay in our guide here.

How much tax do I have to pay?

Figuring out the tax and national insurance contributions that you have to pay can be stressful. As an employee, your company sorts all this out for you.

Freelancers, instead, pay estimated taxes twice a year, known as “payments on account” (more on this later). Tax payments for the self-employed are based on “profit”, which is total income minus expenses.

If you are baffled by tax returns? Check out our step-by-step guide to how to fill yours in here.

How much can I earn before tax as a freelancer?

All of us, freelance or employed, are allowed to earn a certain amount before we have to pay tax. This is known as the personal allowance, currently set at £12,570 for the 2024-25 tax year.

The situation is different for high earners, who start to lose £1 for every £2 they earn over £100,000. So if you take home £110,000 a year, you would be entitled to just £7,500 tax free.

If you are freelance and employed, HMRC will apply the allowance to the role that it sees as your main job.

How much tax you pay above the personal allowance depends on how much you earn.

In England, Wales and Northern Ireland, there are three tax bands:

• Basic rate – 20% on earnings £12,570 to £50,270 (if this is your main job)
• Higher-rate – 40% tax payable on earnings of £50,271 – £125,140
• Additional rate – 45% on earnings above £125,141

There are two extra bands in Scotland.

Both the personal allowance threshold of £12,570 and the higher rate threshold of £50,270 are being frozen until 2028.

Your combined income from freelance and employed work, if you do both, are used to calculate which band you are in.

If together it pushes you into the higher-rate band, you will be taxed at 40% on a proportion of your earnings.

What national insurance do I pay currently if I am self-employed?

A Health & Social Care Levy resulted in a temporary increase in the rate of NICs from 6 April 2022 by 1.25% for employers, employees and the self-employed.

From July 2022, the threshold at which you start to make NICs increased to £12,570. Find out more about this and what it means for your earnings in our article here.

On 6 April 2023/24, NIC rates reverted back to 2021/22 levels, and the 1.25% became a brand new tax: the Health and Social Care Levy.

The contributions that you make will depend 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 £6,725 or more a year (2023/24)

plus

• Class 4 if profits are £12,570 or more a year (2023/24)
• 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. 

If you are both employed and self-employed, you will have to pay Class 1, taken out of your wages by your employer, plus Class 2 and Class 4 for your self-employed work.

How much you pay depends on your combined income from all your jobs and the taxman will tell you know after you’ve filed your self assessment tax return.

What national insurance will I pay if I am self-employed on earnings from April 2024?

In his Autumn Statement on 22 November 2023, the chancellor Jeremy Hunt announced two changes to national insurance for self-employed people.

Firstly, the class 2 national insurance will be abolished from April.

That is a “flat rate compulsory charge, currently £3.45 a week, paid by self-employed people earning more than £12,570 which gives state pension entitlement”, said Hunt, saving the “average self-employed person £192 a year”.

Class 4 national insurance paid by self-employed people, which were set at 9% tax on earnings between £12,570 and £50,270 will be reduced to 8%.

This was cut again to 6% in the spring budget.

What can I expense as a freelancer?

Expenses are the taxman’s way of acknowledging that it costs money to run a business, the rules are strict on what you can expense. A cost must be considered “wholly and exclusively” for business purposes, for example:.

1. Travel – fuel, tickets
2. Office supplies and bills
3. Staff salaries
4. Marketing and websites
5. Training courses
6. Insurance
7. Vehicles like cars or vans 
8. Equipment, such as a computer system

For a full list of expenses for the self-employed visit gov.uk.

What is the trading allowance?

There is a £1,000 tax-free “trading allowance” for those just carrying out bits and bobs of freelance work on the side. This means you don’t need to worry about doing taxes and expenses.

If you earn over £1,000 you can choose to either use the trading allowance (so £1,000 of your income is tax-free), or you can enter the world of expenses. You can’t claim the trading allowance and expenses – it’s one or the other.

What’s the best accountancy software for freelancers?

User friendly accountancy software for individuals and small businesses is available from the likes of Xero and QuickBooks to help work out income and expenses. Some have mobile apps which make things even easier.

A business account like Coconut will do much of the bookkeeping legwork for you, including showing you your estimated taxes so you can keep on top of cash flow.

If you prefer the more traditional method of folders, highlighter pens and sticky notes (all expensable, by the way), then just make sure you keep a thorough record of all your invoices, receipts and business expenses through the year.

There are lots of great tech tools to help freelancers. We’ve rounded them up here.

What are payments on account?

You need to fill out HMRC’s self-assessment form 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.

What you pay is your freelance tax bill minus any tax deductions such as expenses. Don’t worry, HMRC will sort out the calculations for you. 

At the same time as you do this, you will also be signed up to something called “payments on account”. This is money that you are required to pay twice a year in advance to cover the current financial year’s likely tax bill. They are meant to help freelancers by spreading the tax burden.  

WARNING: You might get a bit of a shock in the first year as you will have to settle the previous year’s bill PLUS 50% of your estimated current year’s bill by January 31. The deadline for the other half is July 31.

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

IR35 or the “off-payroll working rules”

IR35 is a set of rules that freelancers and contractors need to follow.

Contractors working in the private sector through an intermediary, such as a limited company, used to be able to decide themselves whether they are self-employed or employed. Or, in taxman speak, whether they are “in” or “out” of IR35.

Most decided they are outside IR35, as there are significant tax perks. Some companies too reduced their costs by relying on freelance staff or contractors who are essentially disguised employees.

It’s this practice that the new IR35 rules are targeting. 

Since a rule change in April 6, 2021, the company offering you work is responsible for determining your status. If they get it wrong, they face big fines.

The legislation only applies to you if you answer yes to both these questions:

• Your services are provided through an intermediary, such as a:
  • personal service company like a limited company
  • recruitment agency
  • partnership
• You do work for medium or large-sized private sector businesses

If an employer decides you fall “inside IR35” for a particular job, it will deduct tax from your pay; if it rules that you are self-employed, then you remain “outside IR35” and responsible for your own taxes.

The specifics of your contract will determine whether it is inside or outside IR35, so you could find yourself doing both types of work. 

You can read more about the new IR35 rules and how they might affect you in our article.