October 13, 2020

I’ve just started freelancing, how do I pay income tax?

Written by Martin Baxter

Freelancing is becoming increasingly popular as a form of employment in the UK. One in seven people in Britain are now self-employed, and this trend is driven mainly by an increase in the number of skilled freelancers. According to stats from the Association for Independent Professionals and the Self-Employed (IPSE), the number of freelancers in professional, managerial and technical occupations has risen to over 2 million, an increase of 47% since 2008. Whether you’re a busy parent looking for a flexible working solution, a university graduate trying to build a portfolio, or an experienced professional looking to wind down into semi-retirement, freelancing offers an exciting opportunity for you to work for yourself and build your own business specialising in the things you care about. It’s no wonder so many people are turning to freelance life! 

However, people often tell us that the most daunting thing about freelancing is tax. Unlike a standard employment contract, where your employer is responsible for paying your income tax and National Insurance through Pay As You Earn (PAYE), as a freelancer, you’ll have to calculate and pay your own tax. There’s no doubt it’s a complicated system and the idea of getting it wrong can be scary. It can be tempting for new freelancers to put it off and bury their head in the sand, but it’s much better to take a proactive approach. Developing good habits early on in your freelance career will help keep your tax affairs running smoothly and save you headaches down the line. 

How do I pay tax as a freelancer? 

Most self-employed people in the UK pay income tax through their Self-Assessment system. This is an online form on the government website where you input the financial details of your employment and the system calculates how much tax you owe. You can also then pay the tax owed through the same system using the reference number that it gives you. The system runs on an annual basis. The tax year runs from April-April, and Self-Assessment forms must be completed and all tax owed paid by 31st January the following year. It’s a good idea to do this well ahead of time and not leave it all until the last minute. When it gets close to the deadline, the HMRC helplines get very busy and waiting times increase. You also risk making a mistake if you’re rushing to get it done. The first time you apply for Self-Assessment you also need to wait for various information to come to you from HMRC, including your Government Gateway account details (if you don’t already have one), and your Unique Taxpayer Reference (UTR). These come via the post so make sure you contact HMRC well in advance of the deadline to make sure you are set up on the system and ready to go. Remember, you can be fined if you don’t file your return and pay your tax owed by the deadline. 

To fill in your tax return you will need to know: 

  • Your National Insurance number 
  • Your Unique Taxpayer Reference 
  • Details of your untaxed income – e.g. how much income you have made from freelancing, and any other sources of income such as dividends or interest 
  • Records of your expenses from self-employment (these are deducted from your income to calculate your profit) 
  • Details of any contributions (e.g. to charity or to a pension) which might be entitled to tax relief 
  • P60 or payslips if you have other income that you have already paid income tax on (such as if you have a part-time job while freelancing, or were employed for part of the year before you took up freelancing). 

Keep your taxes tidy 

Once you have these things gathered together, you’re ready to tackle that form! But again, don’t wait until January to do this. There are routines you should get into all year round to help keep your taxes tidy. Make a habit of these things right from the off and your tax return will be easy and quick to fill in, and you’ll have all the information to hand if you are selected for an audit. 

  • Keep all receipts for business-related expenditure 
  • Log these in a spending diary as you go 
  • Keep a detailed spreadsheet of all your outgoings 
  • Keep a detailed spreadsheet of all your income 
  • Invoice each client with a unique invoice number 
  • Log invoices, including the amount, date invoiced and date paid 

The system will automatically calculate your tax owed, but it’s a good idea to do a rough calculation yourself as you go, so you know how much to put aside to pay your tax bill. You can look up your Personal Allowance entitlement online and get an idea of your likely tax bill using the HMRC “ready reckoner” tool, which calculates based on your average weekly or monthly profit. Keep a running total of your profit (income minus expenditure) to see where you are up to in any given tax year. 

Ask an accountant 

If the thought of dealing with all these numbers brings you out in a cold sweat,  you can always delegate the responsibility. Many accountants now specialise in freelance clients, and the rates should be scalable depending on the size of your business. The rules above still apply, as your job will take them less time if you present them with an orderly spreadsheet and set of invoices rather than a messy box full of receipts. They can act as your “agent” and deal with HMRC on your behalf, including completing the Self-Assessment form for you. Good accountants get very busy around the tax return deadline so make sure you engage one early on to secure their services. It’s an extra expense but can be worth it for the time saved – and they may be able to recommend ways to reduce your tax bill. Ask other freelancers for recommendations. 

Dinghy can help 

Tax is never going to be a freelancers’ favourite topic, but by following the tips in this guide, you should be able to get things up and running smoothly for your first Self-Assessment. And remember, if you’re just starting out, don’t forget to set up business insurance. Dinghy’s insurance for freelancers includes our unique “Freelancer Assist” service, which has a free tax helpline and can provide support if you’re subject to a tax investigation. Oh, and of course, it counts as a business expense – so don’t forget to deduct it. Once that first tax return is submitted, go and do something nice to celebrate. It’s a huge milestone in your self-employed career! 

About Martin Baxter

Read more blog posts by Martin Baxter


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