You can decide to commit to being self-employed full time, or freelance as your bit on the side. However, a more complicated issue is whether you intend to be a sole trader, or set up as a limited company.
This is the more popular option, accounting for 60% of all businesses in the UK
- More straightforward then setting up as a limited company.
- Should your business fail, you are the hook of any debts, meaning you could lose things like your home.
A limited company is considered its own entity, and you, as a director, its employee
- As an employee you are not responsible for company debt and your personal property isn’t at risk.
- You can legitimately pay less personal tax than a sole trader.
- Employees’ executive pensions can be funded as a legitimate business expense
- There are two sets of tax issues for you to get your head around: personal tax and your businesses tax.
- You will need to be aware of IR35 legislation if you provide your services through a limited company.
- More complicated than setting up as a sole trader.
Whatever path you choose has to be right for you, so do your homework and take your time over it.
What to do as a new freelancer?
1. Fill out HMRC’s self-assessment form.
- Tell the taxman – you need to tell the taxman that you are self-employed by registering for self-assessment on the HMRC website
- Watch out for deadlines – you have until October 5 after the end of the tax year during which you went freelance to register or there could be penalties to pay. NOTE: the financial year starts on April 6, so if you become self-employed in February, you have eight months to register.
- You’re UTR – a letter should arrive within 10 days containing your 10-digit unique taxpayer reference (UTR) number. You will need this when it comes to paying tax.
- Your online account– HMRC will set up your online self-assessment account so you are ready to file your tax return when the time comes.
2. Register for VAT
- While you are at it – at the same time you can also register for VAT. Value added tax is paid by customers on most, though not all, goods and services, and is currently set at 20% in the UK.
- Your turnover – if it is over £85,000 in a tax year, then you have to register with HMRC. If you make less, it’s voluntary.
- Confirmation – you will be sent a certificate confirming your VAT number and key dates for when you need to submit your first return and payment.
- Allow plenty of time – if could take up to a month to receive your certificate, during which time you can’t charge or show VAT on your invoice, you will still have to pay it to the taxman.
- Let your customers know – you will be charging more during this time to cover the tax and will reissue them with invoices once you have your VAT number.
How much do you pay the taxman?
Figuring out the tax and national insurance contributions that you have to pay can be stressful. As an employee, your company sorts all of this out for you.
Freelancers, instead, pay estimated taxes twice a year, known as “payments on account”. Tax payments for the self-employed are based on “profit”, which is total income minus expenses.
What can you expense as a freelancer?
Expenses are the taxman’s way to acknowledging that it costs money to run a business, the rules are strict on what you can expense. A cost must be considered for business purposes, for examples
- Travel – fuel/tickets
- Office Supplies & Bills
- Staff Salaries
- Marketing and websites
- Training Courses
- Marketing & Websites
How much can you earn before tax as a freelancer?
All of us, freelance or employed, are allowed to earn a certain amount before we have to pay tax. This is known as the personal allowance, currently set at £12,570 for the 2021-22 tax year.
The situation is different for high earners, who start to lose £1 for every £2 they earn over £100,000. So if you take home £110,000 a year, you would be entitled to just £7,500 tax-free
If you are a freelancer and employed. HMRC will apply the allowance to the role that it sees as your main job.