In the wake of Covid-19, the UK is still adapting to the changing trends in the job market. Various job opportunities are available, and freelancing is one of the most prominent. According to a study, approximately 4.1 million people in the UK prefer to work for themselves.
Being a freelancer in the UK means being self-employed. The freelance tax in the UK is very much different from those employed within a company. Brexit has also impacted the UK freelancers who worked with the UK business.
What is the Self-Employed Tax System in the UK?
Her Majesty's Revenue and Customs (HMRC) collects taxes for self-employed people. Despite the growing popularity of freelancing, the term is yet not registered with the authorities.
HMRC figures out the taxes depending on the type of your employment. Whether you earn as a business partner, sole trader, or limited company, you must provide employment status to earn the taxes.
Self-employed people in the UK may have to pay National Insurance Contributions and income tax, and under specific scenarios, they must also pay VAT. Individuals must fill out a self-assessment each year to file for tax for self-employed people in the UK.
The residents will need to pay taxes on their global income. On the other hand, non-residents can pay taxes only for their UK kingdom. You will need to pay corporation tax if you have a limited company.
How to Tax Register as Self-Employed in the UK?
The steps to register for Self-assessment in the UK include the following:
- Have a user ID and password to log in to the Government Gateway.
- Create a business tax account.
- Set up the account as an organization.
- To file the return, you will receive a 10-digit Unique Taxpayer Reference for self-assessment.
- Send the tax return details within the deadline.
- The Self-assessment bill needs to be paid within 31 January.
What are the Tax Deductions and Credits for Self-Employed People in the UK?
The HMRC provides various costs within the allowable expenses. Some of the most prominent ones are as follows:
- Staff cost
- Rent and utilities
- The financial cost and bank charges
- Office cost
- Travel cost
- Marketing and advertising fee
- Travel fees related to business
However, taking money from the business income for personal reasons will not be included in the allowable expense. If you have your own company, the rules for filing the taxes will be different. Therefore, you must maintain a record of personal purchases from that company and report it in this case.
Step to Pay Self-Employed Tax in the UK
If you work as a freelancer in the UK, you should be paying tax on freelance work in the UK. It is advisable to follow the rules for paying freelance tax in the UK to avoid missing out on any benefits.
You must pay income tax after deducting the allowable expense as a freelancer. You should file the self-assessment tax return details online by 31 October post which the HMRC will send a bill. The details will be displayed within 72 hours when you file the return.
Many people also file for post declaration, which must be paid within 31 January. Many freelancers also opt for a second payment deadline where they make an advance payment, referred to as payment on account. This payment is usually made twice a year, 31 January and 31 July.
Filing the return in time is advisable to prevent extra interest or penalty. If your deadline is on a weekend or public holiday, filing for a return on the last working day is advisable.
As a freelancer, you can pay taxes via different modes. These include:
- Telephone banking
- Via your bank
- Via Clearing House Automated Payment System
- Direct Debit
- Via Bankers Automated Clearing Service
Tax and National Insurance Calculator for Freelancers in the UK
To understand the tax and National Insurance In the UK as a freelancer, I can advise you to use a self-employed tax calculator. If you are doing well in the self-employed business, you have the flexibility to pay Class 4 National Insurance.
Similar to the taxes you pay, the contributions for National Insurance will also be made on Self-assessment tax returns. However, understand the National Insurance tax rate on your profits. For the financial year 2022-23, for a profit between £12,570 to £50,270, the rate is 10.25%, and for a profit above £50,270, the rate is 3.25%.
Self-Employed VAT Rates in the UK
As a freelancer, you will be eligible to pay VAT depending on your annual turnover. For 2022-23, the taxable VAT threshold is £85,000. If you are self-employed, you can pay VAT tax online. You will need to submit the return details for VAT to HMRC. If you have a small business, the VAT charges will vary significantly. Therefore, make sure to follow the rules.
Do self-employed people need to pay Social Security Taxes in the UK?
As a freelancer, you may need to pay two different types in terms of NICs for the Social Security Taxes. These include:
- Class 2: A rate of 3.15% per week will be levied on profits of £6,725 for 2022-23.
- Class 4: 3.25% will be levied on the profit above £50,270. However, for a profit between £9,880 to £50,270, the taxable rate is 10.25%.
As a freelancer, you may reach out to a professional accountant who can help you understand the freelance tax and provide professional advice about your situation. Therefore, make sure to research the taxes before starting as a freelancer.
How much can I earn before tax as a freelancer?
Before paying the taxes, freelancers will be eligible to earn a certain amount. In the current financial year 2022-23, the allowance is £12,570.
How much tax do you pay as a freelancer in the UK?
Freelancers need to pay income tax with a progressive rate of up to 45% and incorporation tax up to 19% on the profits.
Do freelancers pay more or less tax than employees?
No. Freelancers don't pay more income tax than the employees because the tax rate is the same for both.
How are freelancers and employees taxed differently in the UK?
The taxation between the two is the two different tax systems. The freelancers are taxed based on self-assessment tax returns, whereas the employees are taxed in the PAYE system, i.e., Pay as You Earn.
How to pay tax if you're employed and freelancing?
If you are employed, the employer will be responsible for taking care of taxes concerning the payroll system. Nonetheless, as a freelancer, you may need to register as self-employed with HMRC. Make sure you apply the correct tax code to pay the taxes for employed and freelancing.
Are There Any Penalties for Payment in Taxes for Freelancers?
If any self-employed person fails to pay taxes within the deadline, they will be fined. For being three months late, you will need to pay £100. However, if you fail the taxes in time, you may also schedule a payment plan with the HMRC.