If you work as a freelancer, either full-time or in addition to any employed work, you will often be so busy keeping your clients and customers happy, that little time is left to consider your tax liabilities. The following comprehensive guide is here to help you navigate the rules relating to Income Tax, National Insurance and Value Added Tax (VAT).
Tax on freelance work in the UK
When working on a freelance basis, assuming you earn over £1,000 in self-employed income during the tax year (this runs from 6 April to 5 April), either as your sole or second income, you will need to register with HMRC for self-assessment.
You will then be required to file a tax return every year setting out your business profits, minus allowable expenses, and paying Income Tax and National Insurance on any taxable income over and above the relevant thresholds.
For the tax year 20200-2023, the standard personal allowance threshold for Income Tax purposes is £12,570. Unless you earn over £100,000, any self-employed income earned below the applicable threshold will be tax-free. Your allowance will be reduced by £1 for every £2 that your adjusted net income is above the £100,000 threshold.
As a freelancer, you will also be potentially liable to pay both Class 2 and Class 4 National Insurance contributions depending on how much you earn. For the tax year 2022-2023, the small profits threshold for Class 2 is set at £6,725 (£6,515 in the 2021/22 tax year). For Class 4, you will become liable on earnings over £11,908 for 2022/23 (£9,568 for 2021-2022).
If your VAT taxable turnover is below £85,000, you will not need to be VAT-registered with HMRC, although you can opt to voluntarily register if it would benefit your freelance business, for example, by reclaiming VAT on any purchases made. You will then need to charge the right amount of VAT on your freelance services, submit quarterly VAT returns and pay any VAT due.
Tax rates for freelance work
The amount of Income Tax payable on your freelance earnings will depend on the level of taxable income above your personal allowance and how much of this income falls within each tax band for the relevant year. Tax is calculated on total earnings, so if you’re working freelance as a second job, you’ll have to pay tax on your combined income.
For the tax year 2022-2023, the following bands and rates will apply to any taxable income, ie; any income over your personal threshold:
Income tax rate |
Taxable income amount |
| Basic rate of 20% | Up to £37,700 (so taxable income between £12,571 to £50,270) |
| Higher rate of 40% | Between £37,701 and £150,000 (so taxable income between £50,271 to £150,000) |
| Additional rate of 45% | Taxable income over £150,000. |
If you live and work in Scotland as a freelancer, there are different income tax bands and rates.
In respect of National Insurance contributions, if you earn over the small profits threshold for Class 2 NI (£6,725 for 2022/2023), you will liable to pay a fixed rate of £3.15 for each week of self-employment. For Class 4 NI, if you earn over the lower profit limit (£11,908 for 2022-2023), you will be liable to pay contributions at a rate of 10.25% on profits between £11,908 and £50,270 and 3.25 per cent on profits over £50,270.
There is also an upper profit limit for Class 4 NI, where you will pay a reduced rate of 3.25% on profits over £50,270 for 2022-2023.
How to declare tax on freelance work
If you’re filing a self-assessment return for the first time, you must register as a freelance worker with HMRC by 5 October in the second tax year that your business has been running. You may be fined if you fail to register as a freelancer in time. The government is rolling out a new scheme to move the tax system fully online (Making Tax Digital), so it’s best to register for self-assessment online, although if you can’t use the online service you can register by post.
Once you’ve registered for self-assessment you’ll be sent a 10-digit Unique Taxpayer Reference (UTR) number. HMRC will also send you a code to activate your online account.
As a freelancer, you must file an online self-assessment return for Income Tax and National Insurance purposes by 31 January of the year following the tax year to which it applies. For 2021-2022, your tax return must be filed by 31 January 2023. For postal returns you will need to submit your form by 31 October 2022. For existing freelancers who have previously filed tax returns by post, you can benefit from the extended deadline for submitting your tax return by registering to use the online service. You’ll need your UTR to create an online account. Once you’ve registered, HMRC will send you an activation code.
For those of you who work freelance in addition to paid employment, you may be able to pay any tax due on your self-employed earnings through your existing PAYE tax code. To qualify, you must owe less than £3,000 on your tax bill. You must also submit your paper tax return by 31 October or your online tax return online by 30 December.
The deadline for payment of any Income Tax and National Insurance is 31st January of the year following the tax year to which it applies, so the same date for filing your online tax return. If your tax bill is over £1,000, you will also need to make a payment on account by the same date to cover your potential tax liabilities for the upcoming year. This will be assessed at 50% of your bill, payable in two instalments. The second instalment will be payable by 31 July.
If you fail to file your self-assessment return in time, you will be charged a penalty of £100. There will be additional penalties if you delay in filing your return for more than three months. A penalty may also be imposed for any late payment of tax, together with interest.
What freelance expenses can you claim
As a freelancer, you can offset various expenses against your taxable profits, meaning you pay less tax, provided they relate wholly and exclusively to the running of your business. These can include thing like travel, office and advertising costs. If you work from home, as is the case for many freelancers, you may also be able to claim for the cost of any bills for business use.
In respect of both vehicle expenses and working from home, you can opt to use HMRC’s simplified expenses system. This will allow you to apply a flat rate, such as a flat rate for mileage or a flat rate based on the hours you work from home each month, rather than the actual costs directly attributable to running your business.
Prior to completing your self-assessment return, you can use the online simplified expenses checker on the government website to compare what you can claim using the flat rates against your actual costs.
As a freelancer, you are given a £1,000 tax exemption on trading income from self-employment. This is known as a trading allowance. If your expenses are less than £1,000, you can use this allowance instead of deducting your actual or simplified expenses.
Freelance work accounting records
When running your own business, even if you also work on an employed basis, you must keep records of your freelance income and outgoings. Your records should include a breakdown of all sales and any other income, as well as any expenses incurred, together with supporting documentation, such as sales invoices, bank statements and receipts.
When you submit your self-assessment return, you won’t need to send these records or any other paperwork to HMRC. However you will need to refer to your records to accurately report your freelance income and claim any allowable expenses on your return. You’ll also need to keep these records for a period of six years, as HMRC may ask to see them.
If you’re VAT-registered, you’ll need to keep VAT records. There are already online reporting rules in place for ‘Making Tax Digital for VAT’. This means that if you have a VAT taxable turnover of more than £85,000, you’re now required to use digital methods to store your VAT information and submit your quarterly returns to HMRC. From 1 April 2022, all VAT-registered businesses must register under the new rules, regardless of earnings.
Best practice tips for freelancers
Working as a freelancer involves a number of financial obligations to HMRC, where you’ll be solely responsible for filing your returns by the deadline date, ensuring that you accurately report any income and outgoings, and for paying your tax in full and on time.
The following best practice tips for freelance work can help you to avoid some of the common pitfalls when it comes to working on a self-employed freelance basis:
Always plan ahead
By putting aside money each month from your freelance income to cover any potential tax and National Insurance liabilities, you can budget ahead for the upcoming year.
As a new freelancer, it’s easy to overlook the possibility of payments on account when your tax bill falls due. You must therefore have sufficient funds for the two additional instalments you’ll be required to pay if your tax bill is assessed at over £1,000.
Keep accurate and up-to-date records
By having a suitable record-keeping system in place for recording your sales and expenses for the tax year, this will not only help you to complete your self-assessment return, but ensure that you claim the maximum allowable expenses to reduce your overall tax liability. Good record-keeping, including retaining copies of any invoices and receipts etc, is also important if you ever come under investigation by HMRC, providing clear evidence of what you’ve reported and claimed.
Take expert advice
By securing expert advice from a tax specialist well in advance of filing your self-assessment return, you can maximise any allowable expenses and plan ahead for any unexpected payments. The cost of specialist advice can very often outweigh the cost of penalties and interest for any reporting and payment defaults.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
