Freelancing is a popular choice for many workers in the UK, and for tax purposes, freelancers are classified as self-employed individuals. Depending on the nature of your business, you may be subject to different taxes. However, all self-employed individuals are required to pay income tax and National Insurance contributions (NICs). Additional taxes may apply depending on the type of work you do, which will be discussed later.

Which taxes apply to freelancers?

Understanding which taxes apply and how to file them correctly is essential for staying compliant with HMRC. We break down the key taxes freelancers need to be aware of, including income tax, National Insurance contributions, VAT, and other potential obligations based on your business structure. Stay informed and organised to ensure smooth tax filings and avoid penalties.

Income Tax

Freelancers in the UK are required to pay income tax on their profits, which are calculated as total income minus allowable business expenses. The UK uses a progressive tax system, meaning the more you earn, the higher the percentage of tax you’ll pay on the income within each tax band.

  • Personal allowance: The first £12,570 (for 2024/25) of your income is tax-free.
  • Basic rate: You pay 20% on income between £12,571 and £50,270.
  • Higher rate: You pay 40% on income between £50,271 and £150,000.
  • Additional rate: You pay 45% on income over £150,000.

What to bear in mind:

  • You’ll need to file a Self-Assessment tax return each year to report your income and expenses.
  • The deadline for submitting your Self-Assessment is January 31 for online submissions.

National Insurance Contributions (NICs)

Self-employed individuals in the UK also pay National Insurance (NI) contributions. These contributions are split into Class 2 and Class 4 NICs:

  • Class 2 NICs: Payable if your profits are over £6,725 (for 2024/25). The rate is £3.45 per week.
  • Class 4 NICs: Payable if your profits exceed £12,570. The rate is 9% on profits between £12,570 and £50,270, and 2% on profits above £50,270.

What to bear in mind:

  • NICs are used to fund state benefits such as the NHS, pensions, and unemployment benefits.
  • Class 2 NICs are paid automatically through the Self-Assessment system, while Class 4 NICs are calculated alongside income tax.

VAT (Value Added Tax)

If a freelancer’s turnover exceeds £85,000 in a 12-month period, they must register for VAT. VAT is charged on most goods and services, and freelancers will need to collect VAT on behalf of the HMRC from their clients.

There are different VAT schemes available, including:

  • Standard VAT rate: 20%
  • Reduced VAT rate: 5% (for certain goods and services)
  • Zero-rated VAT: 0% (for certain items like food, books, and children’s clothing)

What to bear in mind:

  • Even if you’re under the £85,000 threshold, you can voluntarily register for VAT if it benefits your business.

Corporation Tax (if operating as a limited company)

If you choose to operate as a limited company, the business will be required to pay corporation tax on its profits. For the 2024/25 tax year, the corporation tax rate is:

  • 19% on profits up to £50,000.
  • 25% on profits over £250,000.
  • A marginal rate applies to profits between £50,000 and £250,000.

What to bear in mind:

  • Operating as a limited company has tax advantages, but it comes with additional reporting requirements and administrative tasks.

Other Taxes

Freelancers may encounter additional taxes depending on their type of business, industry, or location. Some of the common taxes include:

  • Business Rates: If you operate from commercial property, you may be liable for business rates, which are a tax on the value of the property you use for your business.
  • Capital Gains Tax: If you sell assets (e.g., equipment, property) as part of your business, you may need to pay Capital Gains Tax on any profit made.
  • Dividend Tax: If you’re a director of a limited company and take dividends from the company’s profits, you may need to pay Dividend Tax on the amount received.
Tip

If you’re uncertain about your tax responsibilities, it’s a good idea to consult with a tax professional to ensure you’re fully compliant.

How to file self-employment taxes step by step

If you are self-employed and want to submit your own tax returns without the help of a tax professional, there are a few things to keep in mind. Simple tricks and tips can save a lot of work and stress at the end of the year. In the following step-by-step instructions, we explain how self-employed persons can pay their taxes correctly without too much effort.

Document revenues and expenditure

The most important thing when filing a self-employment tax return is to have a clear, comprehensive overview of your financial year. While there is no law requiring business owners to keep bookkeeping records, it is in their interest to adhere to Generally Accepted Accounting Practice (UK GAAP) to run their business smoothly, submit their taxes effectively, and explain themselves should they become the subject of an audit by Her Majesty’s Revenue and Customs (HMRC). The same goes for the self-employed. The clearer your records are throughout the year, the easier it will be to submit your tax return at the end of the tax period.

As a rule, two Excel tables are sufficient to clearly document income and expenditure: one for revenue and one for expenditure. These tables should include the date, service provider/salesperson, service or product description, gross amount, and document reference number (for receipts, invoices you have kept as proof of purchase/sale) in separate columns. If you are also liable for VAT, you can create columns for net amounts, VAT rates, and calculated VAT rates. This will help you keep track of things and save work in the long run.

Collect and sort documents

Having revenue and expenses is one thing, being able to keep track of them is another. Business activities always need to be documented, and it is better to have too many than too few. Supporting documents should include receipts for cash payments, transfer receipts, and delivery notes, as well as pay slips, fuel, and entertainment receipts.

Tip

Another important benefit of document organisation is the legal obligation to keep receipts. HMRC requires all self-employed people to keep business records for five years in the event of a discrepancy in your tax return that might warrant investigation. You are also required to hold onto your old tax returns for at least 5 years from the 31st January deadline or the date of submission.

While there is no law stipulating what kind of bookkeeping system you use, it can often be easier and more accurate to use a digital filing system, as well as retaining your paper slips. Recordkeeping requires a good organisation system right from the start, and it should be user-friendly so that you can add new documents to your database as you get them. To do this, programs create different folders where collected documents are systematically filed.

If your business is operating with a cash accounting method, then two core folders are usually sufficient:

  • Account statement folder, filed chronologically; the corresponding documents are filed behind each account statement (unless you have a monthly cost and can file a monthly copy of a lease agreement, etc.)
  • Folder for cash documents, in sequence with a document number
Tip

For very small companies, a simpler method of document organisation may work more effectively: a folder that contains documents which are sorted by date and type (telephone bill, postage receipts, office expenses, etc.) is likely to be sufficient. Additionally, account statements need to be stored chronologically, with none absent.

If profit is instead determined through the accrual accounting method (profit and loss account and balance sheet), then a different method of document organisation is recommended:

  • A/R invoice folder, sequential with document number
  • Incoming invoice folder, sequential with document number
  • Account statement folder, sorted chronologically
  • Cash book folder including supporting cash documents, sorted and documented chronologically

Since receipts need to be kept for several years, and machine receipts fade quickly, they should be kept together with backup copies if possible.

Calculate profit: Cash method or balance sheet?

The amount of income tax you pay depends, among other things, on how much taxable profit you have made – so one of the first questions that arises in a tax return is how to correctly calculate your profit. There are two options for calculating profit: Profit is either determined through the accrual accounting method using a profit and loss account and a balance sheet, or by the cash method – where expenses aren’t recognised until the money is actually paid out.

As a self-employed person, you can enjoy a few advantages when it comes to submitting taxes. While larger corporations and individuals may have other specific accounting obligations when it comes to proving profits, a simple profit report is sufficient for the self-employed. A profit report simply refers to the amount of revenue from sales that exceeds running costs of the business, and can be ascertained by simply subtracting your business outgoings from your business earnings. Depending on whether your profits are higher than your expenditures, you fill out different sections of your self-employed tax return.

Tip

As well as popular accounting programs which can help create a balance sheet, there is also software available to help you work out your net profit.

There are definitely advantages and disadvantages to working out net profit from cash-based accounting, and using the accrual method with a balance sheet and profit and loss margins. Depending on how complex your business’ structure is, and how consistent your profits are, both options can be beneficial.

What can I deduct?

Car expenses, office supplies, purchasing goods, travel expenses, rent (for business premises), employee wages – there are many categories of expenses that the self-employed can deduct from their tax payment, since many operating expenses can be fully or partially deducted from income. This reduces taxable income and the amount of income tax to be paid. The self-employed have a pretty wide scope here, but also run the risk of having their expense claims denied.

When it comes to determining profits, the self-employed should always take into account which items can be deducted from their income. Typical costs that can be fully or partially deducted include:

  • Office supplies, books
  • Rent (for business premises)
  • Training and (relevant) educational costs
  • Wages paid
  • Cars and other fixed assets liable to depreciate
  • Individual retirement plans (IRAs)
  • Entertainment costs
  • Travel expenses
Note

There are some other items that cannot be deducted directly from tax returns, but can be written off over several years. Typical depreciable items are known as durable assets, i.e. purchases of greater value that have longer lives (machinery, computers, office furniture, company cars).

Fill out your forms and submit self-employed tax returns

Self-employed people have the option to submit their taxes electronically (through HMRC’s free Self Assessment online service), through the post, or through a registered tax professional.

Which forms exactly do you need to fill out? All self-employed people must submit yearly self-assessment tax returns to ensure that their National Insurance and income taxes are being paid. To do this, you are required to submit an SA100 form (Tax return for self-assessment).

There are several other forms you may need to fill out, depending on what kind of income your business makes. Here is a full list of supplementary pages.

Once you have completed these forms, the tax return needs to be filed within the deadline. Paper tax returns must be submitted by 31st October, and online tax returns are due on 31st January. If you submit your tax return too late, you will incur a £100 fine.

Lodge an appeal, if required

Once you submit your tax return, there is nothing to do but wait. Forms submitted electronically are generally processed within 21 days, and mailed returns can take from 6-8 weeks to be processed.

Once you receive your tax bill from HMRC, it is good business practice to have each tax assessment checked by a professional. After all, even tax officials can make mistakes. Once you receive a determination from HMRC, you have 30 days to launch an appeal. This must be done in written form, and your appeal request should be posted to your local HMRC office, and should include your name, tax reference number, issues with the decision, and what you believe the correct tax calculation to be. You must also sign the document.

Please refer to the legal disclaimer for this article.

Was this article helpful?
Go to Main Menu