freelancer woman working

If you’re fresh off full-time employment and want to become a freelancer, one of the things you may be unsure about is how to pay taxes – and which taxes you need to pay in the first place.

So, in this article, we’ll go through your legal obligations, including income tax, National Insurance contributions and self-assessment, so that you are aware of all taxes you must pay as a freelancer. As sole trader accountants, we can answer all your questions, so speak to us on 0330 107 9678 for more information on how best to run your business when you’re self-employed.

Registering as Self-Employed with HMRC

One of the first things you must do when you start freelancing is to register as self-employed, allowing you to pay what you owe to HMRC.

The process is simple – make sure that your work counts as self-employment and then register with gov.uk. You’re considered self-employed if you run your own venture, have more than one client simultaneously, choose how and when you work, can hire employees, etc.

Afterwards, you will have to complete your registration through the Government Gateway portal and add information about your business, including its name, address and starting date. You will need a 10-number Unique Taxpayer Reference as well, which HMRC will send so you can set up your account.

Every year, you will also have to submit a self-assessment tax return, which we can do for you if you require help. Your returns have to be error-free and submitted on time so, if you’re unsure which information to add or whether you can send it by the deadline, speak to Gorilla Accounting.

Knowing when to register as self-employed is also important – while you must do it as soon as you get the chance, you also have a deadline to comply with. You must register by 5 October after the end of the tax year in which you started your business. This means that if you started trading in August 2021, you have to register by 5 October 2022.

Income Tax for Freelancers

You will have to pay income tax if you earn money from a business – even if it’s a side venture – or from working. When you work for someone else, this is taken care of by the employer but, if you’re your own boss, you must pay the right amount of tax to HMRC.

For the tax year of 2021/22, the income tax rates are:

  • Personal allowance – Up to £12,570 (0%)
  • Basic rate – From £12,571 to £50,270 (20%)
  • Higher rate – From £50,271 to £150,000 (40%)
  • Additional rate – Over £150,000 (45%)

As small business accountants, we can help you figure out your take-home pay and how much you owe HMRC, so get in touch today!

Paying National Insurance Contributions

As part of your legal obligation, you also have to pay National Insurance Contributions. And, if you’re self-employed, you must pay Class 2 and Class 4:

  • Class 2 – On profits of £6,515 or more a year
  • Class 4 – On profits of £9,569 or more a year

Class 4 National Insurance Contributions are worked out on your self-assessment, just like your income tax. However, certain people don’t do it through their self-assessment but pay voluntary contributions instead – this is only possible if you are, for example:

  • An examiner or invigilator
  • A minister of religion and don’t receive a salary or stipend
  • Someone who has businesses involving property

Feel free to ask us any questions you may have about this, and we’ll be happy to clarify it for you.

freelancer smiling

Submitting a Self-Assessment

As mentioned, you must fill out and submit a self-assessment tax return with HMRC every tax year. If you don’t submit it by the deadline, you have to pay an automatic penalty of £100.

For the tax year of 2020/21, if you’re submitting your return in paper form, you had until midnight of 31 October to do so, while you can send your online return by midnight of 31 January 2022. You must also pay the tax you owe HMRC by midnight 31 January 2022.

Let us help you submit your self-assessment on time – and with all the correct information – as we have a lot of experience handling tax returns. We’ve worked with many freelancers over the years (and in various sectors) and, thus, understand precisely what’s required for compliance.

Registering for VAT

Not everyone has to register for VAT – for example, if your annual turnover doesn’t reach the threshold of £85,000, then you don’t need to register.

Of course, the government suggests that you do it because you can also reclaim VAT paid on some purchases made by the business; this can help you save money, which is crucial for all businesses but even more so for those just starting out. Another benefit of registering is that it can add more credibility to your business.

Being VAT-registered means more admin (you have to submit a return every three months), but having a dedicated accountant on hand to take care of everything will make your job easier. You won’t have to learn all the ins and outs of UK tax law, as we already have that knowledge and are ready to hit the ground running with you.

The VAT rates also change depending on the services and goods sold; for example, children’s clothing has 0% VAT, while standard items tend to be 20%, so you have to make sure you have the right rate as well.

Consider Expenses

The answer to the question ‘how much tax do freelancers pay’ is not an easy one because it’s different for everyone. However, there are many things to consider when it comes to paying less tax, such as taking expenses into account.

When you’re self-employed, you can claim certain costs as allowable expenses, such as:

  • Stationery
  • Phone bills
  • Computers
  • Rent and utility costs
  • Marketing fees
  • Training courses related to your venture
  • Travel costs
  • Material costs

If you’re looking to set up a limited company, things are slightly different. Just like being a sole trader, you can deduct costs from profits before tax, for example. Working through a limited company can be more tax-efficient, so you may choose to incorporate your business after a while. We’re also limited company accountants, so we can help you set everything up and help you maximise your profits.

If you do set up a limited company instead, you must also pay corporation tax, which is currently set at 19% but will increase to 25% for the financial year of 2023/24, although the 19% rate will still apply for companies with taxable profits of £50,000 or less.

Hire an Accountant

If you want to make sure that every I is dotted and every T is crossed, consider getting an accountant – this will also give you peace of mind that all your paperwork is correct. You don’t have to focus on the nitty-gritty, as we can do that for you, freeing you up to focus on your business!

freelancer working

At Gorilla Accounting, we’ll answer all your questions, including things like ‘are freelancers entitled to holiday pay?’ (the answer to this is, sadly, no). Having an accountant on board will take the weight off your shoulders, so leave us a message and request a call back at your convenience – we’ll be happy to discuss your business needs!

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