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Tax Guide for Freelancers

The freelance market has been tremendously growing all around the world with invent of digitalization. Now, most of the jobs can be done remotely, giving freelancers more freedom to utilize their skills in various fields. The freelancing community usually consists of people related to creative industries like writers, musicians, and designers. Most freelancers are solo workers who offer their services in exchange for a pre-decided fee. Freelancing is one of the top three occupational fields in the UK consisting of 2.1 million freelancers as of 2019.

In the UK freelancer are considered as sole-traders and are taxed accordingly. If you are a freelancer and have earned more than £1000, you have to register with HMRC for self-assessment. The financial tax year starts from 6th April, while the deadline to register for self-assessment is 5 October. A freelancer usually feels difficulty while filing for tax due to a lack of tax skills and failure to understand various tax aspects that impact their income. Furthermore, filing for tax gets stressful and complicated for freelancers because of multiple income streams. Here I will guide you on various tax aspects you shall know while filing for tax as a freelancer.

Personal Allowance

You are entitled to receive a certain amount free of tax each year, known as a personal allowance. In the UK, the Personal Allowance rate for 2021 to 2022 is £12,750. Whereas, the income limit to be eligible for Personal Allowance is £100,000. The Personal Allowance decreases by £1 for every £2 of income above the personal allowance limit. Remember not to miss your allowance when filing tax returns.

The income tax rates are specific to four different bands defined by certain income groups. These bands are as follows:

band

income

Tax rate

Personal allowance 

Up to £12,570

0%

Basic rate 

£12,571 to £50,270

20%

Higher rate 

£50,271 to £150,000

40%

Additional rate 

over £150,000

45%

You can also apply for tax relief if you are married or in a civil partnership, by claiming marriage allowances to reduce your partner tax, given that your income less than taxable income.

Allowable expenses

It is important to factor in all allowable expenses in your self-assessment. Missing Allowable Expenses can result in overpaying tax, whereas overclaiming Allowable Expenses can result in tax penalties.

What can be claimed as an allowable expense?

If you are working as a freelancer you can claim:

Expenses on any tools you require to carry out your job. It is also vital to keep a record of all such expenses so that you can easily report them in self-assessment.

Any cost incurred on and during travel for business purposes. However, claiming travel expenses can be tricky. HMRC can investigate if you were traveling solely for business purposes or not.

Any fee you pay for consultancy or any services.

Commission payments on the sale of your work.

Membership and subscription fees.

Another work-related payment you make.

VAT

Value-added tax (VAT) is collected at every stage of the supply chain cycle; from the manufacturer when he buys raw material, from the retailer when he buys certain products from the manufacturer, and then from the consumer, where all tax is paid by the end-user that is the consumer. Valued added tax is directed towards the end of the supply chain, where tax is deducted at every step of the sale cycle while the consumer pays the cumulative VAT.

You have to registered for VAT if your annual turnover is more than £85,000. However, if you have not reached the £85,000 threshold, you can still voluntarily register for VAT. Voluntary registration helps you build a positive image for yourself.

National Insurance

As a freelancer, you pay National Insurance contributions on your earnings. National Insurance contributions are divided into different classes depending on how much a person earns and the source of their income. Freelancer and self-employed individuals are subject to class 2 and 4 National insurance contributions.

The amount you pay as national insurance depends on your employment status and your earnings. There are five national insurance classes; each individual has to pay National insurance contributions according to the class he falls in.

Classes

Earning

age

Paid by

Type of employment

1

More the £184 per week 

Over 16 and under state pension age 

Automatically deducted by the employer

Employed 

1A or 1B

More the £184 per week

Over 16 and under state pension age

Paid by the employer directly on employees’ expense 

Employed 

2

£6,515 or more a year

Over 16 and under state pension age

Self-paid

Self-employed

3

Voluntary paid to avoid gaps in national insurance records 

4

£9,569 or more per year 

Over 16 and under state pension age

Self-paid 

Self-employed

The percentage of national insurance payable for you varies according to the classes mentioned above and other rules and regulations defined by HMRC. For more information visit GOV.UK website.

Tax tips for freelancers

Following are some tips and trick for efficiently filing your tax returns as a freelancer:

Record and sort all your receipts that qualify to be included in tax returns. It will help you keep calm and stress-free during the tax season.

Use a clouding accounting system such as Xero to store your accounting information. It will make it easy to file accurate taxes. For more information on cloud accounting software, you can read “Xero Cloud Accounting: The future of accounting” Always record complete information regarding your working agreement with your clients. Also, keep proof of every work you do as a freelance service. It will save you from potential financial and legal troubles.

Set up an efficient billing system to protect yourself from any financial anomalies. An optimal billing system allows individuals to track their cash flow when working with different clients.

Becoming a successful freelancer is not just about having good skills. You also need to know how to utilize these skills in the freelance market while catering to the financial legalities that come with it. Tax can be stressful and might take some extra time and effort. However, spending too much time and effort on such legalities can detract from your original work, which might end in huge losses. In such a situation, it is best to hire a professional accountancy service. LYEL Accountants provide extensive tax services, providing customers with value-added solutions to their problems. We aim to support small businesses, freelancers, entrepreneurs, and individuals in their growth by educating them on tax issues and providing them with long-term and efficient finical planning.