A Complete Guide to Tax for Freelancers in UK
Freelancers, as opposed to contractors in certain situations, may have signed a contract restricting them from working on more than one project or client and can work on many projects with multiple clients simultaneously. The creative sectors, including authors, singers, and designers, are where the word “freelancer” is most frequently used. These people, who often operate alone, provide their expertise as services to clients and take on various contracts in return for a pre-set payment.
One of the UK’s top three career categories that highly competent people desire is freelancing. As of 2019, more than 2.1 million independent contractors were working in the UK, according to government statistics. Of these 2.1 million, 1.9 million were pursuing freelancing full-time, and 234,000 were doing it in addition to their primary employment.
Freelancing is still on the rise in the UK, with more and more people opting for self-employment and signing up for HMRC self-assessment. Regarding the type of company or service being offered, self-employment encompasses more than simply being a freelancer.
A freelancer is always primarily a self-employed person who likes working as their employer. However, a self-employed person does not always have to be a freelancer. Independent contractors and self-employed individuals are taxed as sole proprietors when it comes to income taxes unless they fall under any other categories they must self-assess, such as property income, partnership income, etc.
The UK Freelance Tax System
HM Revenue and Customs (HMRC) is responsible for collecting and allocating taxes and other payments for self-employed individuals as part of its mandate as the UK’s tax, payment, and customs body.
Although it’s a common way to work, the word “freelancing” isn’t recognised for tax reasons. Instead, you are categorised as a lone proprietor, a business partner, or if you conduct your business through a limited company. HMRC provides a helpful guide to understanding the various forms of working for yourself and finding out your self-employment status.
Overall, everyone working for oneself in the UK must pay income tax, National Insurance payments (NICs), and maybe even VAT. This applies to single proprietors as well as company partners. Each year, tax payments are made by completing a self-assessment form.
Both residents and non-residents are subject to the same tax rates. While the two categories have a few minor rule differences, the main distinction is that residents pay taxes on their worldwide income while non-residents only pay taxes on their income earned in the UK.
Your status as a resident for tax purposes may depend on various circumstances, including whether you work in the UK, own real estate there, or stay there for at least 183 days each year.
On the other hand, if you operate as a limited company in the UK, you are subject to corporate tax. In this instance, there are wholly other regulations that apply.
Registering for Freelance Tax in the UK
If you own a business and have made more than £1,000, you must report it to HMRC. This is possible online. The second tax year for the firm has a registration date of October 5. For instance, if your firm began operations in June 2021, you would have until October 5 2022, to register with HMRC. If you don’t do it by the deadline, you might be fined.
To set up your account for the self-assessment online service, HMRC will send you a letter along with your 10-digit Unique Taxpayer Reference (UTR) when you register. Additionally, a letter with an activation code will be sent within 10 working days (21 days if you are overseas).
By entering this code and the UTR number, you may complete the registration procedure online on the HMRC website. Furthermore, you will be required to provide information about your company, including the trading name and contact information.
You may sign up to pay UK freelance tax via mail as well.
How To Pay Tax as a Freelancer UK?
Due to numerous possible income sources, lack of tax expertise, and lack of knowledge of how various factors affect your income tax bill, HMRC income tax filing may become incredibly difficult and unpleasant for freelancers. Your tax obligations will be the same as a sole trader if you are registered with HMRC as a sole proprietor.
Similarly, you would need to comply with limited company regulations if you wanted to operate as a freelancer through your limited firm. This is because HMRC will tax based on the kind of business entity (sole proprietor or limited company), not the working conditions you may want to associate with. Therefore, it’s critical to comprehend the prerequisites and business startup procedure in the UK.
Creative Freelancers’ Tax Duties
Start by determining if you are qualified to file taxes as a freelancer in the first place or if you are a creative freelancer who hasn’t yet registered as a sole trader. The freelancers who provide creative services could have a different source of revenue than those who offer standard services.
Your tax obligation as a creative freelancer begins when you receive your first paycheck. You must include any money received on your yearly tax return, whether for several YouTube subscribers or the sale of artwork at an exhibition.
Your tax amount may vary depending on your freelancing earnings and any allowable tax deductions if you register with HMRC as a single entrepreneur. In the case of a freelancer, the profits are the entire income less the authorised business expenditures you have incurred. If permitted, you can submit several expenditure claims after registering for a self-assessment tax return. You must first reach a particular income level before having to pay taxes, though.
UK citizens are permitted to earn up to £12,500 in the tax year 20/21 before they must pay income tax. Earnings over this amount are not subject to any tax consequences. However, it can be different for people with various incomes. For instance, someone making £110,000 a year would have a tax-free personal allowance of up to £7,500 because the personal allowance is reduced for every pound earned over 100,000 in a tax year.
The income tax you must pay beyond your personal exemption depends on your annual income. For the tax year from April 6 2020, to April 5 2021, there are many bands ranging from the basic rate to the maximum rate of tax. The bands are as follows.
Basic rate tax, which is equal to 20% of total earnings
Higher rate tax, which is 40% of your entire income if you earn more than £50,000,
If your income exceeds £150,000, you must pay a top rate tax of 45%.
If you work both a regular job and freelance work, and your combined earnings put you in the higher tax bracket, the tax that applies to your earnings is 40 percent on the share of your income greater than £50,000.
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Allowable Expenses as a Freelancer
After deciding whether you are eligible to pay taxes in the UK as a freelancer or not, you must evaluate the expenses you will need to incur to meet your everyday company needs. Like self-employed people, creative freelancers can benefit from significant tax cuts and reliefs, but only if they successfully locate and disclose all of the deductible costs in their tax returns.
List of Expenses You Can Claim as a Freelance Contractor To Reduce Tax
The following list of tax-deductible costs is provided for your reference:
- Any equipment you need to finish your tasks, such as painting supplies like canvas or writing instruments. If you are a photographer, you may deduct the cost of the advanced lens you purchased for your camera. Anything that gives your work an extra dash of originality or worth has the potential to qualify as a cost. If you carefully keep track of all the tools and equipment you usually use to complete the task, it will be beneficial in the long term.
- You can still deduct travel expenditures even if you don’t own a car but still pay for Uber or public transportation to get to meetings or make purchases. The trip to and from your office, if you have one, is not permitted. It is essential to consult your accountant about the specifics because claiming travel expenditures might be challenging.
- Costs incurred by your employee or subcontractor.
- Prices for accounting services and consultation.
- Commissions that you pay when your work is sold.
- Subscriptions or memberships (for business purposes).
- Fees for IT-related services such as site creation and portfolio design.
Speaking to a personal tax accountant will help you categorise all the things you may claim as company expenditures and ensure that your taxes are done correctly. The list of things you can claim as expenses is fairly broad, and there are occasionally industry-specific charges you can claim.
VAT Treatment for Freelance Income
If your yearly revenue exceeds £85,000, you must register your company for VAT. Even if your yearly income falls below the statutory level, you can still voluntarily register for VAT. The benefits of voluntary registration include the ability to recoup the VAT you spent when making purchases of products and services and the improvement of your company’s reputation.
If the tax you paid while making a purchase is more than the tax you charged your customers, you may be able to recoup the difference. A specialised VAT accountant may assist you in understanding any industry-specific VAT treatments and if you can adopt a unique VAT scheme, such as the Flat Rate scheme, the cash scheme, etc. VAT treatment for freelancers is not that different from that of single proprietors or even Limited Companies.
National Insurance for the Self Employed
As a self-employed person or freelancer, you must comply with another regulation, the national insurance contribution requirement. To qualify for various benefits in addition to the state pension, all employees in the UK must meet specific requirements and pay into national insurance.
Earnings, work status, and the source of income all affect how much national insurance is contributed. In the case of employees earning and working for an employer, Class 1 national insurance is applicable; it is deducted at the source and paid to HMRC before the employer disburses the wage.
Class 2 and class 4 national insurance apply to independent contractors and self-employed people. If your profit is or exceeds £6,475 and £9,501, respectively, in a year, you must pay Class 2 and 4 NIC. If you have a regular job and work as a freelancer, you will need to pay Class 1, 2, and 4 NICs based on your combined income. By speaking with a tax professional, you can better grasp the challenges associated with tax and national insurance in your specific situation.
Tips for Having a Hitch-free Tax Season
1. Storing Receipts Will Keep Your Tax Game Up
The best advice for keeping your cool during tax season is to organise and retain every eligible receipt so you can submit your yearly tax returns without making any mistakes. Keeping track of all receipts, even those that may not qualify as expenses because they are a ticket to future tax relief, can be beneficial in the long term.
To determine whether certain receipts should be included in your tax return or not, you may always consult a personal tax accountant. Pay close attention to how you want to safeguard these receipts as well. You might find it useful to keep hard copies and digital versions of any receipt.
You may always write the transaction purpose on the back of a paper receipt to quickly confirm what it is for; this will help you know what these are for if HMRC conducts an investigation.
2. Utilise Cloud Accounting Software
Make it a practice to consistently enter your company’s financial data into an accounting program. If you don’t already have accounting software, we suggest speaking with an accountant who can assist you in choosing the most appropriate program in accordance with your company’s needs and HMRC requirements. Additionally, you might delegate your tax duties to the accountants.
Since filing annual taxes is a difficult, time-consuming procedure that requires complete concentration, it may be difficult for freelancers to set aside additional time for this tax process. Employing a tax accountant can help you save time and money by maximising your tax deductions.
Although employing an accountant may seem like an additional expense, the advantages far outweigh the disadvantages. For instance, a qualified accountant may assist you in finding tax breaks that you may have missed. Additionally, you can always deduct your accountant’s fee from your taxes.
3. Research Your Clients
It’s a good idea to research the customer and determine whether or not they are trustworthy before accepting the first assignment they give you. You can decline the offer to work as a freelancer if you think the customer doesn’t seem very promising. Before signing any contract with a potential customer, please do your due diligence and learn as much as possible about them.
4. Always Have a Contract in Place
A contract is a paper that ensures that both parties have agreed to carry out the activity by the terms and conditions specified. You should ensure that you and your customer have a clear contract since it might protect you from future financial and legal issues.
5. Keep Proof of Work
A customer may hold you accountable for delivering subpar work, which might hurt your portfolio. By employing monitoring software that enables the system to follow your work progress and automatically capture screenshots, you can ensure that this does not occur by maintaining proof of the job done. They can also complete work based on milestones and are often approved by the client.
6. Set up a Billing System
One of the best ways to safeguard your finances is by setting up a billing system. When managing many projects, a billing system makes it possible to keep track of past-due payments and eliminates the need to contact each customer separately. Additionally, you will have better control over your financial flow and be able to predict if you will soon run out of money or not.
Can I Freelance While Working Full-time UK
Freelancing is a legitimate second work option, but you must separately sign up for self-assessment to pay your freelance tax. You can declare the tax you pay through PAYE when registering online, and HMRC will then determine your taxable income, tax brackets, and freelance tax liability.
As a freelancer, it is ideal if you do your study on what you want to accomplish and why you want to do it, talk to a tax, accounting, and business growth specialist, and then take action. The most important resource you have is time, so spend it carefully and choose actions that will benefit you both now and in the future.