Freelance: 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 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 means you can get immediate tax relief. This reduces the tax you owe on your business profits. You can find out more on the government’s website for freelancers. In the UK, every working adult has a personal allowance – the amount they can earn tax-free. After that, you pay an increasing proportion 20%, 40% or 45% depending on your income level.

Freelancers also pay national insurance to qualify for benefits, like the state pension. There are two types: class two, a small flat weekly rate and class four, 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, 6th of April to the 5th of April, 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. Log in to HMRC’s portal online. Five. Enter your income. Six. Enter your allowable expenses. Things like laptops, travel, software, marketing. Seven. Review the calculation of your tax and national insurance. Eight. Submit your return online by the 31st of January each year.

Nine. Pay your tax bill – either in full or through a payment plan. Ten. 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 may ask for payments on your account. These are advance payments towards next year’s bill, due in January and July. This can surprise many new freelancers, so it’s worth setting aside extra cash. 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 profits exceed this amount, or if you expect to exceed it over a 30 day period, you must register. Your taxable profit 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.

Related Resources go here…