What Every Freelancer Needs To Know About Tax

guide to freelance taxWhen you are starting your own business, becoming a freelancer or self-employed, it’s an exciting time as all manner of opportunities open up to you.

But being a freelancer comes with responsibilities too, however, and one of these is freelance tax.

Although you might employ a bookkeeper or an accountant to help you keep your financial records straight, the onus is still on you to make sure you submit your freelance tax return to HMRC on time, and pay the freelance taxes which are due, so we’ve put together this handy guide to freelance tax so you know what to expect and do.

First Things First

The first thing which every freelancer must do is to register with HMRC.

You need to understand whether you are categorised as a sole trader, or as the owner and employee of a limited company: if you are not sure about your status, HMRC’s guide is here.

You can register with HMRC online here, and must register on or before 5 October in your business’ second tax year (i.e. if you start your business in May 2016, you will have until 5 October 2017 to register).

If you don’t register on time, you may be charged a penalty fee.

Record Keeping

Once you have registered with HMRC, you are legally responsible for keeping detailed records of all your income and expenditure, and this is usually done in a cashbook.

It can be a physical notebook that you write everything down in, an Excel spreadsheet, or a specialist piece of bookkeeping software, such as Sage.

The advantage of Sage is that your cashbook is held in the Cloud, so you can access it from multiple devices, and you can share access with your accountant too.

You can also use Sage to automatically do all your calculations and export different types of summaries, so it’s a real bonus if maths isn’t your strong point.

In addition to your cashbook, you should also keep supporting documents, in case HMRC later wants to query what you’ve received and spent.

These documents might include invoices, receipts, and bank statements. Although it is tempting to just throw them in a box and forget about them, it is much better if you file them by date so that you can find them again if you need to.

Your Tax Return

Freelance tax return

Your business’ cashbook will be the basis for your end of year tax return.

Your tax return, a summary of your income and expenditure, is the official document used by HMRC to calculate your freelance tax and national insurance contributions.

If your annual tax return is incomplete or inaccurate, you can be fined heavily, so it is well worth paying an accountant to check it before you submit it.

It’s easiest and most efficient to submit your tax return online, and the deadline for doing this is 31 January each year.

Your Taxes

The tax you have to pay will be divided into two parts: income tax; and national insurance contributions.

If you were working for someone else, these taxes would be taken out of your pay check automatically by your employer, but when you are self-employed your have to pay them yourself.

You can get a rough idea of what your freelance tax liability will be using the HMRC self-assessment calculator.

It is important to note that you will only pay tax on profit, not on turnover, which is why you’ll need to have an accurate calculation of profit derived from your cashbook.

For national insurance, there are two classes: you will pay Class 2 if your profits are more than £5,965 a year; and the higher Class 4 rate if your profits are more than £8,060 a year.

Value Added Tax (VAT)

If your turnover (not profit) exceeds £83,000 a year, you will also have to register with HMRC for VAT.

Even as a freelancer, once VAT registered you have to charge VAT to your clients, keep VAT records, submit an annual VAT return, and pay the right amount of VAT to HMRC.

The benefit of being VAT registered is that you can claim back the VAT on any products or services you buy. More details about VAT registration and how it works are online here.

Getting Help

Not knowing, or understanding, the law is not considered a legitimate defence for making mistakes with your freelance tax return, or being unable to pay.

If you have questions, or want to read more, your first port of call should be the help section on the HMRC website; and you can also consult an accountant or tax adviser.

You will pay them for their time, but it’s money well spent as not only will they help you avoid penalty fines, but they will also advise you how to make the best of tax deductions, exemptions, and other business benefits you can claim.

Are you a sole trader or a limited business owner? Know the difference, and find out what your freelance tax obligations are. It’s an essential part of running your business, and staying on the right side of the law.

Over to You

Are you are a freelancer? Share your experience with us in he comments below

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4 Comments

  1. Thanks for writing such an easy-to-follow, simple guide to completing taxes as a freelancer. I’m in the beginning stages of freelancing at the moment and to say the taxes side is overwhelming is an understatement. It’s currently not in my budget to employ an accountant (I don’t have a budget for anything right now–as it is, I bought a laptop out of pocket), so I’m going it alone, and I’m sure this guide will come in handy!

    1. Hi Rebekah, thank you for taking the time to leave your comments and I am glad you found the post useful. I totally agree taxes can be very overwhelming but don’t worry; Rome wasn’t built in a day, it gets clearer and easier overtime.

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