Tax, NI & self-assessment
Simple tips for new freelancers to help you manage your tax when you’re self-employed.
Freelancers – the tax situation
When you’re self-employed, you are responsible for sorting out your own tax. You do this through a process called self-assessment.
To self-assess, you need to register.
When you register as self-employed, you’ll have to start paying national insurance – a small weekly payment.
Starting out and getting registered
Once you start freelancing, you have until October 5 after the tax year when you started to register. Otherwise you risk a penalty fine. So if you started working between April 6 2014 and April 5 2015, you should have registered by October 5 2015. Don’t worry if you didn’t though – as long as you pay your tax by the deadline you won’t be fined.
That all important self-assessment deadline
Getting help if you’re worried about tax
The information on the GOV.UK website is improving, but sometimes you just have to contact HMRC. Be prepared for frustration – every year, HMRC gets embarrassing criticism for the long wait times on its helpline.
Tip – use HMRC’s online chat before resorting to phone.
And try to call outside the busiest times of the year – October, January and July.
Tip – calculate your monthly or weekly tax
Use this calculator that shows you roughly how much you need to put aside for tax each week or month (we say ‘roughly’ because everyone has a ‘personal allowance’ they don’t pay tax on. Plus as you earn more you may end up in a higher tax bracket. This page has the details to stop you getting caught out.)
Tip – set up a separate account for your tax
Store your tax away each month so you don’t have to worry about finding the cash at the end of the tax year.
People keep saying I can claim back tax – what do they mean?
When you’re self-employed, some expenses are tax-deductible. For example if you need a new laptop to do your work, you can deduct the price of the laptop from your income before you calculate your tax, meaning you’ll pay less tax. People sometimes get confused and think this means that the money they’ve spent will be given back to them – what it actually means is that the overall amount of money you have to pay tax on is reduced. You can find out more about what’s tax-deductible here.
Tip – keep all your receipts
Without them, you can’t prove to HMRC what you spent and therefore what tax deductions you’re allowed to make.
Do you need an accountant?
Employment and tax law is complicated and it’s worth getting professional advice from an accountant. If you’re not one of life’s natural form-fillers, they’ll get the job done quickly for you. Accountants should know what’s tax deductible, when the deadlines are and how to file your self-assessment online. It’s worth noting though that if they make a mistake, you’ll be held responsible.
Tip – you might be earning too little to self-assess.
HMRC has said that it wants people to avoid filling out a tax return if they earn very little, putting this figure at around £2000. So if you’re only doing a tiny bit of freelancing (perhaps on top of your other job) and don’t expect to earn more than that you might be able to avoid it. You should still try to tell HMRC though.
Do you need to pay VAT?
If you earn over £83,000 in a year, you’ll need to register within 30 days to pay VAT at 20%. It’s usual to pass this cost onto your clients, so for example you should let them know you charge VAT when negotiating your fee.