Taxes and expenses

Freelancing gives you freedom, but it also means you’re in charge of your own taxes. Don’t worry if this feels overwhelming. This video will explain the basics in simple steps so you can stay on track. 

When you’re self-employed, tax isn’t deducted out of your pay automatically. Instead, you need to report what you earn and pay the correct amount to HMRC, that’s the UK’s tax authority. 

You’ll do this each year through something called a self–assessment tax return. This is a form usually completed online, where you tell HMRC what you earned and what expenses you can claim. HMRC then calculates how much tax you owe. 

You don’t pay tax on everything you earn. In fact, if you only earn a small amount from self-employment, for example through a side hustle, you can use a trading allowance. This is a tax exemption that allows individuals to earn a certain amount per tax year from trading or miscellaneous income, without having to declare it to the HMRC or pay tax on it. 

You want to keep careful track of your earnings and expenses when you work for yourself. If you earn more than the trading allowance, you can subtract the costs of running your business, called allowable expenses. You’re entitled to claim certain expenses as deductions against your income if you are self-employed and you submit a tax return. When it comes to deductible expenses, there are quite a few categories to keep in mind. 

First, office costs. Things like stationery, phone bills and other essentials. Then, work-related travel expenses such as fuel, parking, or train and bus fares. Clothing can also count, but only if it’s necessary for your work, like uniforms. Staff costs are another category, including wages or subcontractor fees. You can also deduct certain financial costs, such as insurance or bank charges. 

Don’t forget about the costs of your business premises like heating, lighting and business rates. Advertising and marketing expenses are deductible too. For example, the cost of running a website. And finally, training courses directly related to your business can be included as well. 

All of these fall under allowable expenses, helping you reduce your tax bill. Calculating your tax-deductible expenses provides immediate tax relief by reducing the profit you’re actually taxed on. You can find out more on the government’s website for freelancers.

In the UK, every working adult has a Personal Allowance – this is an amount you can earn tax-free. After that, you pay an increasing proportion – typically twenty, forty, or forty-five per cent depending on your income level. While these are the standard rates, they do vary slightly if you are a taxpayer in Scotland, as you can see from this comparison on screen. 

Freelancers also pay national insurance to qualify for benefits, like the state pension. There are two types: class two, which is a small flat weekly rate, and class four, which is a percentage of your profits. 

So, what does filing your self-assessment involve?

One. You must send a tax return if in the last tax year, you earned more than a certain amount before taking off anything you can claim tax relief on. 

Two. Register as self-employed with HMRC.

Three. Get your unique taxpayer reference (UTR) by post.

Four. For most people starting out you’ll log in to HMRC’s portal online. 

Five. Enter your total income for the year 

Six. Enter your allowable expenses. Things like laptops, travel, software, marketing. 

Seven. The system will then calculate exactly what you owe in tax and National Insurance. 

Eight. Submit your return online by the 31st of January each year. 

Now, a quick but important heads-up: if your earnings are above a certain level, a system called ‘Making Tax Digital‘ applies to you. Instead of using the standard portal once a year, you are required to use HMRC–approved software to keep digital records and send summaries of your income and expenses multiple times a year. This is in addition to your final end-of-year declaration that should be submitted through your HMRC- approved software. Note that these thresholds will change in the future so always check gov.uk for the latest.

Nine. Pay your tax bill – either in full or through a payment plan. Most people pay in two instalments during the year, but this depends on your specific circumstances. 

Ten. Stay organised. It’s worth setting up digital calendar reminders and signing up for HMRC’s email alerts. You’ll receive a fine if you submit your tax return late. 

When you submit your first Self Assessment, HMRC will likely ask for ‘payments on account.‘ These are advance payments toward your next tax bill, due every January and July. This often catches new freelancers off guard because it can significantly increase your first-ever payment, so it’s wise to set aside extra cash from day one. 

For self-employed individuals, there is a mandatory limit at which you must register for VAT, which stands for value added tax. If your taxable turnover exceeds this amount in any rolling twelve-month period, not just the tax year, you must register. If you expect to exceed it within the next thirty days, you can also register in advance. Your taxable turnover includes all sales of goods and services that are not exempt from VAT. 

You can choose to register for VAT even if your turnover is below the limit. This could be beneficial if you often buy goods and services from other VAT registered businesses. Then, you can reclaim the VAT that you paid. HMRC offers lots of free help: guides, videos, live webinars and a self–assessment helpline. You can also set up a payment plan online if you can’t pay your bill all at once. 

Freelancing gives you independence, but it also means taking charge of your own tax. Keep good records, set aside money regularly and use the support available. That way, tax doesn’t have to be stressful.