So you’ve become your own boss – congratulations! But whether you have a part-time job or a full-time freelance job, this new and exciting move can be pretty scary too.
One thing that many new freelancers struggle with is their tax debt. That is why we have put together brief instructions for freelancers on the subject of self-assessment and tax returns, hopefully to make your work easier.
First off, what kind of freelancer will you be?
The vast majority of freelancers will be sole proprietorships. In fact, sole proprietorships make up 60% of all UK small businesses.
The beauty of being a sole proprietorship is that it’s incredibly easy to start up. In reality, however, you and your company are the same entity. So if your business fails, you are responsible for any debt or liability.
To get around this, some freelancers decide to set up a GmbH. This is especially attractive to those who want to separate their business debts and personal liabilities. You basically become your own manager / employee – and yes, it’s more complicated being a sole proprietor.
If you go down this route, you need to be clear about what it means for both your personal tax and your company’s tax. Do your homework and choose the path that is right for you. In this article, however, we will focus on sole proprietorships in general.
Founding as a self-employed person
Most freelancers choose to be sole proprietors. The first thing you need to do is notify HMRC of this by registering for self-assessment on the HMRC website. You must also register for self-assessment if you are the director of a limited liability company.
Note the registration deadline. You must register by October 5th of the same calendar year that your first professional tax year ends.
The tax year starts on April 6th each year. For example, let’s say you became a freelancer in December 2020, your first tax year ends on April 6, 2021, and you need to register by October 5, 2021.
After registration you will receive a 10-digit Unique Taxpayer Reference (UTR) and can access your personal online account to file your tax return.
Which deadlines and dates are important for the self-assessment?
As mentioned, the UK tax year runs from April 6th to April 5th the following year. The current tax year therefore began on April 6, 2021 and ends on April 5, 2022.
You have to make 2 payments on account every year, unless:
- Her previous self-assessment tax bill was less than £ 1,000
- You have already paid 80% or more of your total tax
Each payment corresponds to half of your tax bill from the previous year. Payments are usually due by midnight on January 31st and July 31st.
How much tax do I have to pay?
If you’re employed, your employer takes care of your tax and NI contributions every payday. As a freelancer, it’s up to you to pay the right amount in taxes and social security. The amount you pay depends on how much profit you make. Your profit is what is left of your self-employed income when you subtract all eligible expenses.
Like employees, you can earn up to the Personal Allowance Threshold (currently £ 12,570) before paying tax, although you will still have to report your income and pay NI.
Anything you earn above this threshold will be taxed on your winnings. Taxes are paid in tax brackets or thresholds, so you might pay one tax rate on money you make within one class and then another tax rate on money that falls in another class.
Basic rate: 20% on receipts between £ 12,570 and £ 50,270
Higher rate: 40% tax on income between £ 50,271 and £ 150,000
Surcharge: 45% on income of £ 150,000 or more
There are two additional bands for people in Scotland. Please see the Government’s Scotland Income Tax page for more information.
Note: Put the money in a separate account for each job you do!
Better do it sooner than later
We always recommend submitting your self assessment as soon as possible (not least so that you can get it out of the way and focus on business). Early registration also has other advantages, which we explain below.
Better plan your cash flow
Once you have the size of your tax bill, it will be easier to see how much cash you really have. Being able to predict your immediate and medium-term cash needs and spending is an important part of running a successful business.
Knowing exactly what your tax bill is going to be can help ensure that you are setting aside the correct amount. And if you think you’re having trouble paying, there is time to reach out to HMRC and set up a payment plan instead of panicking at the last minute.
More time to prepare
Gathering all of the numbers and supporting documents for your tax return can take some time, especially if you are already employed. But if you get it done early, you can do it in your own time and in bite-sized pieces to reduce the chance of problems and mistakes.
Don’t miss the deadline!
Late filing of your tax return is not a good move. First, you will be charged an automatic £ 100 fine regardless of what you owe. If after 3 months it is still too late there will be a late fee of £ 10 per day (up to a maximum of £ 900).
It gets really expensive after 6 months with a fine of £ 300 or 5% of your tax, whichever is greater. This will happen again if the delay is more than 12 months. All of these punishments are one on top of the other, not in their place. It really adds up, which is why you should contact HMRC (or your accountant) as soon as possible if you are concerned about how to pay.
Where can I find more information?
You can find a wealth of information on all of this and more on the Government Tax Return Self-Assessment Pages. Don’t forget to check out our How to Become a Freelancer section too!