Working as a freelancer can be a great option for those looking for more flexibility, whether it’s picking your own hours or being free to work remotely from the location of your choice. Particularly since the COVID-19 pandemic, more and more people are opting for more flexible working conditions, and going freelance is a great way to achieve this.
However, along with this freedom comes a number of responsibilities. Not only do you need to track your own expenses and manage without benefits such as holiday leave and sick pay, you must also pay your own taxes. To help you with this, we’ve put together this simple guide that explains how to pay tax if you are a freelancer.
What type of freelancer are you?
To figure out how to pay tax as a freelancer, it’s important to first establish what kind of freelancer you are. In fact, there are two different routes that you can take:
The first option is to become a sole trader. This is the more common option, accounting for over half of small businesses operating in the UK. Becoming a sole trader is quick, simple and is the cheaper option, but it means that you will be personally liable for any debts if your business fails, which could affect your personal assets such as your home.
The other option is to form a limited company which will become its own entity, with you acting as an employee (the director). In this case, you will not be personally liable for any company debt, and you will have to pay less tax than a sole trader. However, the taxation system is a little bit more complicated as you will have to pay both personal and business tax.
What should new freelancers do?
Many new freelancers find themselves asking: “how do I pay tax as a freelancer?” There are a number of different steps that you should take when you first start out.
First of all, those wondering how to pay tax as a freelancer need to go to HRMC’s self-assessment form where you can register yourself as self-employed. Make sure you do this before the deadline, which is in October after the end of the tax year during which you started trading as a freelancer. You will then be issued an online account, and a unique taxpayer reference (UTR) which will arrive to you via post within 10 days.
How to pay tax as a freelancer in the UK
Once you have registered as self-employed, you will have until the end of January to pay your taxes online, or until the end of October if you plan to do this by post. You should follow the instructions on the HMRC website and carefully fill in all the details to receive an accurate tax calculation.
Make sure to add any business expenses when you are completing the form. These are any costs associated with running your business, such as office supplies, marketing and websites, insurance and travel. By logging these, you will reduce the amount of tax that you are obliged to pay.
How much can you earn before tax?
If you’re wondering how to pay tax as a freelancer in the UK, it’s also essential to know how much you can earn tax free. Everyone, whether freelancer or employed, is entitled to earn a certain amount before paying tax, which is known as the personal allowance. This is currently £12,570 for the 2021-2022 tax year, so any earnings up to this point will not be taxed.
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