June 6, 2022 • 5 MIN READ

The UK Freelance Tax System

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Let’s delve into freelancing and learn more about financial responsibilities, namely, the tax requirements for the self-employed and freelancers

The number of freelancers in the UK has already exceeded 4.75 million people, and it continues to grow. There are various reasons why someone might want to be self-employed. Some people may just want to earn a little more from their hobby or obtain more job satisfaction, while others may have aspirations of starting a business. Let’s delve into freelancing and learn more about financial responsibilities, namely, the tax requirements for the self-employed and freelancers.

The UK Freelance Tax System

 HMRC (HM Revenue & Customs) is the control and supervisory service, namely, an independent department of the Government of the United Kingdom responsible for tax collection and allocation. Of course, the service continues to monitor the implementation of legislation, but now more and more attention is being paid to providing advice to people on the calculation and payment of taxes.

As a rule, you cannot pay taxes as a freelancer since there is no such term in the tax system. However, it is necessary to bear financial obligations, including tax, such as National Insurance contributions (NICs) and VAT. So, HMRC offers three different classification options that may suit you: a sole trader, a partner in a business, or a person who trades through a limited company. 

There are slight differences in the UK taxation system between residents and non-residents of the country. The tax rates are the same for both groups, but the taxable amounts of money are calculated differently: residents pay tax on any income regardless of the country of receipt, and non-residents – only UK-based income.

Setting Up As a Sole Trader

HMRC recommends that you let them know you're setting up as self-employed as soon as you start trading from your new business. This is likely to happen as soon as you receive your first self-employed income.

A sole trader is self-employed. You are legally required to register as self-employed with HMRC if you're a sole trader earning more than £1,000 in the tax year. In the UK, the tax year runs from 6th April to 5th April. 

It’s possible to qualify for benefits if you become a sole trader. You are required to prove that you are self-employed, for instance, to apply for tax-free childcare. A self-employed person can make Class 2 National Insurance contributions voluntarily. Keep in mind you’ll need to receive a National Insurance number in the case you don’t have one or when moving to set up a business in the UK.

Self-Employed Income Tax 

In the UK, there is an income tax; that is, it is calculated from how much you earn and the eligible expenses you have incurred. There is a set of progressive taxation ranges that determine exactly what amount should be paid. A self-employed person can deduct certain business-related expenses from your income when calculating taxable profit. In addition, the tax rates in Scotland differ compared to those in England, Northern Ireland, and Wales.

Income tax as an individual entrepreneur (sole trader) will be calculated at the personal tax rate. A freelancer or self-employed professional must pay VAT when their yearly turnover is more than the threshold of £85,000.

Freelance Tax Deductions in the UK

HMRC considers several costs as allowable expenses that you can deduct from your taxable income amount. These costs are the following:

  1. Office expenses 
  2. Transportation expenses 
  3. Uniform and clothing expenses
  4. Staff costs 
  5. Cost of raw materials and supplies
  6. Financial expenses & bank charges
  7. Rent and utility costs
  8. Marketing and advertising fees
  9. Training courses

Your expenses and private purchases are not included in the category of business costs. If you run your own limited liability company, you can deduct any business expenses from your pre-tax profit, but it’s necessary to report how these expenses can support your business in the future and become a company benefit.

Deductions When You Work from Home

There is a so-called reasonable amount determined by HMRC that you can deduct from your income before paying tax in the case when you use your home as an office. For example, if you use one room out of four as an office, you have the right to claim a 25% deduction from housing costs, including a share of rent or mortgage, or utilities such as gas, electricity, water tariffs, as well as council tax and insurance.

How to Pay Freelance Tax in the UK

You’ll need to start completing a Self Assessment to let HMRC (HM Revenue & Customs) know about your self-employed income. It’s advisable to keep records of expenses. HMRC will calculate what extra tax you owe. The good news is you’ll also be able to claim any allowable business expenses you have from setting up and running your new business, and these can reduce the amount of tax you need to pay.

You have until the 5th October after the end of the tax year to register for Self Assessment. The annual filing and payment deadline for your Self Assessment is the 31st January each year. Another payment is usually due on the 31st July. 

There are several ways to pay taxes: 

  • Online banking
  • Via the Clearing House Automated Payment System (CHAPS)
  • Via the Bankers Automated Clearing Service (BACS)
  • Online by corporate credit card 
  • Direct Debit
  • At your bank, offline
  • By check through your mail

You’ll need to make sure you put money aside to meet any tax due and avoid missing the deadlines, or you’ll face fines and penalties.

Social Security for Self-Employed Workers in the UK

It is necessary to pay social security in the form of NICs to be eligible for the state pension or other benefits. Freelancers and self-employed people pay two types of NICs:

Class 2: For 2022-23, with a profit of £6,725 or more per year, the rate is £3.15 per week.

Class 4: For 2022-23, a NIC is 10.25% with a profit of £9,880 to £50,270. With a profit above £50,270, the rate is 3.25%.

Most self-employed workers pay by Self Assessment. As we mentioned in the reasons why a person might want to become a sole trader, it’s possible to conduct voluntary Class 2 National Insurance contributions. Such an opportunity have self-employed people engaged in business related to land or property, ministers of religion without a salary or scholarship, as well as investors who don’t receive commissions.

Payment Solution for Freelancers & Startups 

With PayRow, you get access to up-to-date, affordable, and global online financial management instruments. We focus on client support at every stage of the business cycle. Our customers also get the opportunity to pay incoming invoices directly using Payrow automatic invoicing and specially designed templates. We make it possible to conduct SEPA and SWIFT transfers in the blink of an eye. Use Automatic statements and download data about your income, payments, and expenses for any selected period. Simplify your business processes and manage your finances with digital payment solutions. Enjoy fast and easy digital payments with no hidden fees thanks to the transparent pricing rule with Payrow!