What tax rules should UK freelancers be aware of?

If you’re thinking of joining the growing ranks of those working freelance in the UK, congratulations!

But before you jump in, there are some tax obligations that come with being self-employed that you need to know about.

What is a freelancer?

First things first – a freelancer isn’t a business structure but rather a term used for a self-employed worker. A freelancer is flexible – they can choose how much they work, as well as the projects they commit to and what they charge.

For many, the freelance route is one leading to a high level of flexibility and job satisfaction.

A freelancer can operate under two broad business structures – a sole trader or a limited company.

What taxes do freelancers pay?

The tax obligations a freelancer faces all depends on which business structure they’ve chosen – sole trader or limited company.

Let’s look briefly at the tax rules of each to help you decide which is right for you.

Sole trader

As a sole trader, you’re considered legally indistinguishable from your freelancer business. Basically, you ARE your business – and won’t need a separate address, accounts or anything else in order to operate.

It also means that any debt you incur through your business (e.g., struggling to sell products that have cost you money to make) is your debt – you can’t write it off via your business.

Under the sole trader business structure, your tax obligations as a freelancer are:

Income tax

Income tax is taxed at the basic (20%), higher (40%) and additional (45%) rates. It’s up to you to calculate what you owe from your pre-tax profit, keep this tax separate from profits and submit all tax owed to HMRC by 31 January each year via your Self-Assessment tax return.

Payments on account – around 50% of the following year’s projected tax bill – must then be added by 31 June.

National Insurance Contributions (NICs)

As a sole trader, you must register for Class 2 and Class 4 NICs. These amount to relatively small sums – £3.15 per week for Class 2 and 10.25% of earnings greater than £9,568 but less than £50,270, and 3.25% on earnings over £50,270.

VAT

If your annual turnover is more than £85,000 you must register your freelance sole trader business for VAT.

VAT must then be paid quarterly. Again, it’s up to you to keep track of VAT payments and separate them from other company finances.

Limited company

Limited companies are a little different. For starters, a limited company must have at least one director and one shareholder – although they can both be you.

Further, as a limited company director you have ‘limited liability’ – you’re considered legally separate from your freelancer business and won’t be personally liable for legally-incurred debts incurred by the company.

A freelancer with a limited company must follow these tax rules:

Corporation tax

Corporation tax is due at a rate of 19% of profits and is due nine months after your nominated accounting period for corporation tax ends. Corporation tax is lower than income tax, which is why some freelancers choose a limited company for tax-efficiency.

Income tax

Any salary you pay yourself as Director will be subject to income tax. Most Directors keep their own salary low in order to benefit from reduced tax payable on dividends. Both income and dividends must be declared via annual Self-Assessment tax return by 31 January.

Tax on dividends

As Director, you can pay yourself dividends via share ownership in your own limited company.

You do get a tax-free allowance on dividends (currently £2000) but anything above that is taxable at a basic rate of 7.5% (on £2000 – £37,500 in dividends) a higher rate of 32.5% (£37,501 – £150,000) and an additional rate of 38.1% (£150,000+).

VAT

Much like with a sole trader, any limited company with a turnover exceeding £85,000pa must register for VAT.

Do I need an accountant as a freelancer?

There is no legal requirement to work with an accountant as a freelancer. However, accountants for freelancers are always a good idea to help shoulder the burden of admin that comes with freelancing, whether as a sole trader or limited company.

A freelancer accountant can help you with:

• Day-to-day bookkeeping
• Managing expenses
• Meeting reporting deadlines
• Paperwork and admin – freeing up your precious time
• Keeping your operations tax-efficient – don’t pay more tax than you need to
• Industry-specific and evolving guidance – for example, IR35 legislation and Brexit

Here at QAccounting, we offer industry leading freelancer accounting services, so if you are a freelancer looking for some assistance with your bookkeeping or personal tax, please don’t hesitate to get in touch with our expert team.