A Freelancer Guide to Tax
Unless you’re freelancing as an accountant you’re probably not going to be a fountain of knowledge when it comes to freelance tax.
But that’s ok, tax doesn’t have to be a scary, unknowable part of being a freelancer. In this guide we explain what you can expect to earn, how this affects your taxes, and how Earnr can help.
How much can I make as a freelancer?
While freelancing isn't a sure-fire route to making lots of money, it is important to understand how much you can make and whether it’ll cover your living costs.
You can have what are called feast and famine periods, where you’re making a lot of money one month and then you're looking for work the next. With this in mind, it helps to see how much you could earn over the course of a year, how you’re tracking towards it and whether you need to make adjustments to cover costs.
Here we compile a couple of the salaries you can expect to have as a freelancer. Although there are many more freelance roles out there, this can help benchmark where you’re at as the year goes on:
Do I need to pay tax as a freelancer?
As a freelancer you need to pay tax on your profit for the year. To find your profit you take all the revenue (or income) earned over the year, and subtract your expenses.
As with all income in the UK you can earn up to £12,570 (this figure is based on the 2021-2022 tax year) each year before being taxed. This is known as your personal allowance.
Once you start earning over this there are three tax bands in the UK. Which you can read in more detail in this Earnr article. But basically they break into these three categories:
- Basic rate: 20% of earnings (You’ve earned between £12,571 and £50,270)
- Higher rate: 40% of earnings (You’ve earned between £50,271 and £150,000)
- Additional rate: 45% of earnings over £150,000
It’s worth bearing in mind that if you live in Scotland there are 2 further bands within this.
There’s also the £1,000 tax free allowance, which means you don’t have to pay tax on the first £1,000 you earn, but if you opt for this, you won’t be able to claim expenses.
You should also be conscious of National Insurance payments. Any profit over £6,515 (based on the 2021-2022 tax year) means National Insurance contributions will begin to come out.
As a freelancer you’ll fall into class 2 and 4 for NI contributions, meaning the payments will be included in your self-assessment when you come to do it and your income will be over £6,515 for Class 2 National Insurance and £9,568 for Class 4 National Insurance.
What type of freelancer am I?
This isn’t just what kind of work you’re doing, but also the self-employed status you have. There are two main forms of self-employment, each with their own benefits and drawbacks. These will decide the kind of tax you pay, whether just on personal profit, or as a separate commercial tax.
The Sole Trader - You’re going solo with no one else being managed by you or working within your organisation.
Benefits are you can set up straight away, you just need to notify HMRC, which you can do in the Earnr app. You also have the same amount of tax to pay as if you were employed and paying through PAYE, as your personal income is considered one and the same as your commercial income.
Drawbacks are that because your personal and commercial incomes are the same, should your business incur any debts or losses, it’s on your personal income too, so you’d be paying out of your own pocket to get back in the green.
The Limited Business - You’re a director or employee of your business, which is its own separate entity.
Benefits are that as a separate entity your business finances are distinct from your own. And costs or debts are not coming out of your bank account, but the business account, so it’s not your personal finances on the line. You can also set up pensions as legitimate expenses which you can’t do as a sole trader, and as a business you can eventually pay less tax than a sole trader.
The drawbacks are that it’s more complicated as a limited company. You have to become registered with Companies House and wait to become incorporated and you have two sets of tax to pay (personal and business).
How do I pay tax as a freelancer?
Each year you need to fill out a self-assessment tax return. What you pay is your freelance tax bill minus the expenses of running your business. You can read more on how to complete your self-assessment tax return in this Earnr article.
The usual cut off date to complete your self-assessment is the 31st of January if you’re doing it online, and 31st of October if you’re completing the form by post.
It’s also worth noting that you have something called ‘Payments on Account’ which are advance payments on your tax bill on the 31st of January and the 31st of July. The idea is that this spreads the burden of payments for freelancers and covers your expected tax bill ahead of it coming out.
The usual advice is to set aside 25%-35% of all your earnings so that when these payments are due, the money is there to make them. Of course you can spend it as you go if you’re confident that you’ll have the money when it comes to doing the self-assessment.
What can I expense as a freelancer?
As a freelancer you’ll have various running costs depending on the work you do. You can deduct these costs from your taxable profit as long as they’re eligible expenses.
So if you earn £50,000 and you claim £9,000 in expenses, you’d only be taxed on £41,000 for the year.
Remember that if you use the £1,000 tax free trading allowance you won’t be able to claim expenses.
So what constitutes an eligible expense? According to gov.uk things you can expense include:
- Office costs, like stationary or your phone bill.
- Travel costs, like fuel, parking, train or bus fares.
- Clothing expenses, like uniforms or aprons.
- Staff costs, like salaries or subcontractor costs.
- Things you buy to sell on, like stock or raw materials.
- Financial costs, like insurance or bank charges.
- Cost of your business premises, like heating or lighting.
- Advertising or marketing, like website costs.
- Training courses related to your business.
This can be a little tricky if you’re working from home where you might use your computer or your heating for work and leisure. The advice is that you work out the cost for a period of time that you used it to work.
- If you use your heating while working from home, work out the heating for that period of time that you worked, in the room that you worked in.
- Or work out the cost of your computer and then the percentage of time you use it for work vs leisure.
So if your laptop cost £1,000 and you used it for work 70% of the time, you could claim £700 back in expenses in your self-assessment.
How can Earnr Help?
Earnr makes self-employed bookkeeping easy, so that you can spend less time worrying about this kind of stuff and more time growing your business.
You can separate your business transactions from your personal ones, track your expenses and get a real-time tax estimate so you know whether or not you need to submit a tax return.