Freelancer tax essentials you need to know
TL;DR:
- You'll pay income tax, National Insurance contributions, and possibly VAT
- Set aside money monthly to avoid a tax bill shock
- Know your deadlines and use accounting software to stay organised
- Consider getting professional advice when you're starting out
Taxes as a freelancer can feel overwhelming at first, but once you know what you're dealing with, it becomes much more manageable. Here's what you need to know to stay on top of your tax obligations.
What taxes will you pay as a freelancer?
The main taxes you'll handle are income tax and National Insurance contributions. These work differently from when you're employed because there's no employer taking them out of your pay automatically.
Income tax is straightforward – it's what you pay on your earnings. The rates are the same as for employees, but you'll calculate and pay it yourself through Self Assessment.
National Insurance contributions fund your state pension and other benefits. As a freelancer, you'll pay Class 2 and Class 4 contributions based on your profits.
VAT comes into play once your turnover hits £85,000 in a 12-month period. You'll need to register, charge VAT to clients, and submit quarterly returns. Some freelancers register voluntarily before hitting the threshold to appear more established or reclaim VAT on business expenses.
Managing your tax payments effectively
The key to stress-free tax management is staying organised and planning ahead.
Set money aside every month
Open a separate savings account just for tax money. Move 25-30% of each payment you receive into this account. This percentage covers most freelancers, but adjust based on your tax rate and circumstances.
This approach means you're never scrambling to find thousands of pounds when your tax bill arrives.
Track your deadlines
Your Self Assessment tax return is due by 31st January each year for the previous tax year. You'll also need to make payments on account if you owe more than £1,000.
VAT returns are due quarterly if you're registered. Set up calendar reminders well before each deadline.
Use accounting software
Tools like Xero, QuickBooks, or FreeAgent connect to your bank account and categorise transactions automatically. They calculate what you owe and can even submit your VAT returns directly to HMRC.
This saves hours of manual bookkeeping and reduces mistakes that could cost you later.
Keep good records
HMRC requires you to keep records for at least five years. Digital records are fine – just make sure they're backed up. Track all business income and expenses, including receipts for anything you're claiming as a business expense.
Common mistakes to avoid
Many new freelancers underestimate their first tax bill. Without an employer deducting tax automatically, it's easy to spend money you'll later owe to HMRC.
Don't ignore small amounts of income or assume cash payments won't be noticed. Declare everything – it's not worth the risk of penalties later.
Missing the Self Assessment deadline costs you a £100 penalty immediately, with additional charges if you're more than three months late.
FAQs
Do I need to register as self-employed immediately?
Register with HMRC by 5th October in your business's second tax year. So if you start freelancing in March 2024, register by 5th October 2024.
Can I claim expenses to reduce my tax bill?
Yes, you can deduct legitimate business expenses from your taxable income. This includes equipment, software subscriptions, office costs, and travel expenses for business purposes.
What happens if I can't pay my tax bill?
Contact HMRC as soon as possible to arrange a payment plan. They're often willing to work with you if you're proactive about the situation.
Should I use an accountant?
An accountant can save you time and often pays for themselves through tax savings and advice. Consider one if your finances are complex or you're earning significant amounts.
Jargon Buster
Self Assessment – The system for paying income tax on earnings that haven't had tax deducted automatically
Class 2 National Insurance – A flat weekly rate you pay if your profits exceed £6,515 per year
Class 4 National Insurance – A percentage of your profits between £12,570 and £50,270
Payments on account – Advance payments towards next year's tax bill, required if you owe over £1,000
VAT threshold – The annual turnover limit (currently £85,000) above which you must register for VAT
Business expenses – Costs you can subtract from your income to reduce your taxable profit
Wrap-up
Getting your taxes sorted as a freelancer isn't as complicated as it first appears. The main thing is staying organised and putting money aside regularly so you're never caught short when bills are due.
Start with good accounting software and build the habit of tracking everything from day one. It takes a few minutes each week but saves hours of stress later.
If you're earning well or have complex circumstances, an accountant's advice often pays for itself. Even a one-off consultation when you're starting out can set you up with the right systems.
Ready to build your freelance business properly? Join thousands of other freelancers getting practical advice at Pixelhaze Academy.