Tax Obligations for Freelancers: What You Need to Know

If you’re working a full-time or part-time job and earning extra income by freelancing on the side, it’s important to understand your tax obligations. Freelancing on the side can be a great way to earn extra money, but it can also be confusing when it comes to paying taxes. Many people are unsure about what taxes they need to pay, how much they need to pay, and when they need to pay them.

The tax you need to pay as a freelance worker will depend on your income and your employment status. If you’re working as a sole trader, you’ll need to pay income tax and National Insurance contributions on your profits. If you’re working as a limited company, you’ll need to pay corporation tax on your profits. Understanding your tax obligations is essential to avoid penalties and fines from HMRC. In this article, we’ll explore what taxes you need to pay as a freelancer on the side and when you need to pay them.

Understanding Freelance Work

As a freelancer, you are self-employed and work on a project-by-project basis for various clients. Freelancing is different from a regular job, where you work for an employer under an employment contract. When you freelance, you are responsible for finding clients, negotiating rates, and managing your own workload.

Freelance Vs Regular Job

Freelancing offers flexibility and the ability to work on projects that interest you. However, it also means that you do not have a steady income, benefits, or job security. In contrast, regular jobs provide a steady income, benefits, and job security, but may not offer the same level of flexibility and autonomy.

Freelance as a Side Hustle

Many people take up freelancing as a side hustle, in addition to their regular job. This can be a great way to earn extra income, develop new skills, and pursue hobbies. However, it is important to understand the tax implications of freelancing on the side.

Career Path in Freelancing

Freelancing can also be a viable career path. As a freelancer, you have the opportunity to build a portfolio of work, develop a network of clients, and specialize in a particular area. However, it is important to have a solid understanding of business and financial management, as well as marketing and sales skills, to succeed as a freelancer.

In summary, freelancing can be a rewarding and fulfilling way to work. Whether you are freelancing as a side hustle or pursuing a freelance career, it is important to understand the differences between freelancing and a regular job, and the tax implications of freelancing on the side.

Basics of Taxation

As a freelancer on the side, it’s important to understand the basics of taxation in the UK. Here are the key things you need to know:

Income Tax

As a freelancer, you’ll need to pay income tax on your earnings. The amount of income tax you pay depends on your income and tax bracket. For the tax year 2023/2024, the basic rate of income tax is 20%, which applies to income up to £50,271. Income over £50,271 up to £150,000 is charged at the higher rate of 40%, and income over £150,000 is charged at the additional rate of 45%. If you’re a Scottish resident, different tax rates apply.

National Insurance Contributions

As a freelancer, you may also need to pay National Insurance contributions (NICs) on your earnings. The amount of NICs you pay depends on your income and whether you’re employed or self-employed. For the tax year 2023/2024, the NICs rate for self-employed individuals is 9% on earnings between £9,568 and £50,270, and 2% on earnings above £50,270. If you’re employed and self-employed, you’ll need to pay both Class 1 NICs and Class 2 or 4 NICs.

Corporation Tax

If you operate as a limited company, you’ll need to pay corporation tax on your profits. The current rate of corporation tax is 19%. You’ll need to file a corporation tax return and pay any tax due 9 months and 1 day after the end of your accounting period.

VAT

If your annual turnover exceeds £85,000, you’ll need to register for VAT and charge VAT on your goods or services. The current standard rate of VAT is 20%. If you’re registered for VAT, you’ll need to file VAT returns and pay any VAT due to HMRC.

It’s important to keep accurate records of your income and expenses, and to file your tax returns on time to avoid penalties and interest charges. If you’re unsure about your tax obligations as a freelancer, it’s always best to seek professional advice from an accountant or tax specialist.

Tax Obligations for Freelancers

If you are a freelancer working on the side, you will need to be aware of your tax obligations. In the UK, freelancers are considered self-employed, which means they are responsible for paying their own taxes and National Insurance contributions.

Self-Assessment System

As a freelancer, you will need to register for the self-assessment system. This means you will need to complete a self-assessment tax return each year, which will show how much you have earned and how much tax you owe. You will need to register for self-assessment with HM Revenue and Customs (HMRC) by 5 October following the end of the tax year in which you started freelancing.

Class 2 and Class 4 National Insurance

As a self-employed freelancer, you will also need to pay Class 2 and Class 4 National Insurance contributions. Class 2 contributions are a flat rate of £3.05 per week if your profits are above a certain amount. Class 4 contributions are based on your profits and are charged as a percentage of your earnings. You will need to pay your National Insurance contributions through your self-assessment tax return.

Trading Allowance

If you earn less than £1,000 from your freelance work in a tax year, you may be eligible for the trading allowance. This means you will not need to declare this income or pay tax on it. However, if you earn more than £1,000, you will need to declare all of your income and pay tax on it.

Allowable Expenses

As a freelancer, you may be able to claim certain expenses as tax deductions. Allowable expenses are expenses that are necessary for your business, such as equipment, travel costs, and office rent. You will need to keep accurate records of your expenses and include them on your self-assessment tax return.

Overall, freelancing on the side can be a great way to earn extra income, but it is important to be aware of your tax obligations. By registering for self-assessment, paying your National Insurance contributions, and claiming allowable expenses, you can ensure that you are meeting your tax obligations and avoiding any penalties from HMRC.

Handling Tax Liability

As a freelancer on the side, you are responsible for handling your own tax liability. This means that you need to calculate your taxable income, understand tax deductions, and avoid fines for non-compliance.

Calculating Taxable Income

To calculate your taxable income, you need to add up all of your income from freelancing on the side and subtract any allowable expenses. You will then be left with your taxable income, which is the amount that you will be taxed on.

It’s important to note that you will be taxed on your total income, including any income from your main job. You will need to declare all of your income to HMRC and pay tax on it accordingly.

Understanding Tax Deductions

There are a number of tax deductions that you may be able to claim as a freelancer on the side. These include expenses such as travel costs, equipment, and professional fees.

It’s important to keep accurate records of all of your expenses, as this will make it easier to calculate your taxable income and claim any deductions that you are entitled to.

Avoiding Fines

If you fail to pay the correct amount of tax or submit your tax return on time, you may be subject to fines. It’s important to stay on top of your tax liability and make sure that you are meeting all of your obligations as a freelancer on the side.

If you are unsure about any aspect of your tax liability, it’s always a good idea to seek professional advice. A qualified accountant or tax advisor can help you to understand your obligations and make sure that you are complying with all of the relevant regulations.

In summary, handling tax liability as a freelancer on the side requires careful record-keeping, an understanding of tax deductions, and an awareness of potential fines for non-compliance. By staying on top of your tax liability and seeking professional advice when needed, you can ensure that you are meeting all of your obligations and avoiding any unnecessary penalties.

Freelancing and Your Main Job

As a freelancer on the side, you may also have a main job that provides you with a regular income. Balancing multiple income streams can be tricky, especially when it comes to tax. Here are some things to keep in mind:

Balancing Multiple Income Streams

When you have a main job and freelancing on the side, you need to make sure you’re paying the correct amount of tax on both incomes. You’ll need to declare your side income to HMRC and pay tax on it, but you won’t have to pay National Insurance contributions if you earn less than £6,515 per year.

Moving into a Higher Tax Band

If your extra money from freelancing pushes you into a higher tax band, you’ll need to pay more tax on both your main job and your side income. For the 2023/24 and 2022/23 tax years, the basic rate limit is £37,700, and the higher rate limit is £100,000. If your total income (including your main job and side income) exceeds £100,000, you’ll be in the additional rate band, and you’ll need to pay 45% tax on the amount over £150,000.

It’s essential to keep track of your income and make sure you’re paying the correct amount of tax. If you’re unsure about your tax obligations or need help with your tax return, consider consulting a tax professional or using tax software.

Freelancing as a Business

If you’re freelancing on the side, it’s important to understand the tax implications of your work. Depending on your situation, you may need to register as a sole trader or form a limited company.

Sole Trader Vs Limited Company

As a sole trader, you are self-employed and run your business as an individual. You will need to register with HM Revenue & Customs (HMRC) and file a Self Assessment tax return each year. You will also be responsible for paying Income Tax on your profits and Class 2 and Class 4 National Insurance contributions.

Forming a limited company, on the other hand, means that you are creating a separate legal entity to run your business. You will need to register your company with Companies House and file annual accounts and a confirmation statement. As a director of the company, you will be paid a salary and may also receive dividends. You will need to pay Income Tax and National Insurance on your salary, but dividends are taxed at a lower rate.

Deciding whether to operate as a sole trader or limited company depends on your personal circumstances and the nature of your business. It’s important to seek professional advice before making a decision.

Business Expenses

As a freelancer, you may be able to claim certain business expenses against your taxable profits. This can help reduce your tax bill and increase your take-home pay. Allowable expenses include:

• Office rent and utilities
• Equipment and supplies
• Travel expenses
• Professional fees (e.g. accountant, lawyer)
• Marketing and advertising costs

It’s important to keep accurate records of your expenses, including receipts and invoices, and to only claim for expenses that are wholly and exclusively for business purposes.

In conclusion, freelancing on the side can be a great way to supplement your income, but it’s important to understand the tax implications of your work. Whether you choose to operate as a sole trader or limited company, and what expenses you can claim, will depend on your individual circumstances. Be sure to seek professional advice and keep accurate records to ensure that you are meeting your tax obligations and maximizing your take-home pay.

Understanding HMRC

If you’re a freelancer on the side, it’s important to understand the role of HM Revenue and Customs (HMRC) in your tax affairs. HMRC is the UK’s tax authority and is responsible for collecting taxes from individuals and businesses. Here are a few key things you need to know about HMRC:

Unique Taxpayer Reference

Every taxpayer in the UK is assigned a Unique Taxpayer Reference (UTR) by HMRC. Your UTR is a 10-digit number that is unique to you and is used to identify you in HMRC’s records. You’ll need your UTR when you register for self-assessment, file your tax return, and pay your taxes. If you don’t have a UTR, you can apply for one online through HMRC’s website.

Personal Allowance

Your Personal Allowance is the amount of income you can earn before you start paying income tax. For the tax year 2023/24, the Personal Allowance is £14,000. This means that you won’t pay any income tax on the first £14,000 of your earnings. If you earn more than £14,000, you’ll pay income tax on the amount above your Personal Allowance.

PAYE System

If you’re employed and earn more than your Personal Allowance, your employer will deduct income tax and National Insurance contributions (NICs) from your pay using the PAYE system. This system is designed to make it easier for employers to collect and pay tax on behalf of their employees. However, if you’re a freelancer on the side, you won’t be using the PAYE system. Instead, you’ll need to register for self-assessment and file a tax return each year.

It’s important to keep accurate records of your income and expenses as a freelancer on the side, as you’ll need this information when you file your tax return. You can use accounting software or spreadsheets to help you keep track of your finances. If you’re unsure about any aspect of your tax affairs, you can contact HMRC for advice and guidance.