12 Tax questions freelancers ask

Jun 14

Tax! Even the word is enough to send shivers down a new freelancer’s spine. But tax doesn’t need to scary. And to help reduce the fear for you, here are the answers to 12 top questions on tax that freelancers ask.

Do I need to register with HMRC as self-employed

Yes! If you’re likely to earn more than £1,000 in a year as a freelancer, you need to tell HMRC that you’re self-employed. The deadline for registering as self-employed is 5 October in the tax year after you started your freelance business, so don’t panic if you’ve already started freelancing and didn’t register on day one - chances are you’ve still got time. For example, if you started trading (ie delivering freelance services) 25 May 2022, you’ve got until 5 October 2023 to register with HMRC - although it’s sensible not to leave it until the last moment.

The easiest way to register as self-employed is online via the government’s website. It’s a fairly simple process but you will need to set up a Government Gateway account if you don’t already have one. You also will need to provide some basic details about yourself, including your name, address and National Insurance number, so make sure you have these to hand when you register.

2. What is a tax year?

A tax year is the 12-month accounting period that HMRC (the UK government department responsible for taxes) uses to work out what tax you owe each year. In the UK, the tax year runs from 6 April to 5 April. This means that the information you include on your tax return will need to cover your income and expenses for your freelance work between these dates.

To keep record keeping simple, many freelancers use the tax year as the financial year for their own accounts. However, you can choose to have a different accounting period, as long as information you include your tax return covers the correct period.

3. When do I need to submit my tax return?

The deadline for submitting your tax return depends on whether you’re sending in a paper copy or submitting your return online. Paper tax returns have to be in by midnight on 31 October for the tax year that ended on 5 April of that year and online tax returns have to be submitted by midnight on 31 January of the following year.

For example, consider the tax year that runs from 6 April 2021 to 5 April 2022. If you want to submit a paper tax return for this year, you have to send it in by 31 October 2022. However, if you submit an online tax return, the deadline extends to 31 January 2023. Either way, if you miss the deadline, you’ll get a penalty of at least £100, so make sure you underline the dates in your diary!

4. How much money can I earn before I need to pay income tax?

You’re allowed to earn up to £1,000 a year from self-employment before you need to pay income tax. This is known as your trading allowance. Once your income goes over £1,000 you may need to pay tax.

However, most people are entitled to a personal allowance – which is an amount of income you can have before you pay income tax. This varies each year and what you’re entitled to also depends your personal circumstances. For the 2022-2023 tax year, the standard personal UK tax allowance is £12,570. It’s important to note that this covers all income, not just your freelance work – so, even if you earn less than this through your freelance work, you may still need to pay income tax if you have other types of income, for example, if you also work part-time for an employer.

If this all sounds super complicated, don’t panic. If you submit your tax return online, the system will automatically work out what allowances you can get and include this in the calculation of the amount of tax you need to pay. It’s one of those times when you definitely appreciate technology!

5. Do I need to pay National Insurance as a freelancer?

Most self-employed freelancers need to pay two types of National Insurance: Class 2 and Class 4 contributions. The amount you pay is based on your profits (ie the amount you have once you deduct your expenses from your self-employed income). In 2022-2023, Class 2 contributions are £3.15 per week if your profits are £6,725 or more per year and Class 4 contributions are 10.25% of profits between £9,881 and £50,270 and 3.25% on profits over £50,270.

If your profits are below the National Insurance thresholds, you might not need to pay any contributions. However, it can still be worth making voluntary contributions to qualify for the full state pension and other relevant benefits.

Your National Insurance contributions will be worked out as part of your self-assessment tax return and you’ll normally pay them along with your income tax.

6. What is a payment on account?

A payment on account is an advance payment towards your tax bill. Once you’ve completed your first full year as a self-employed freelancer (and assuming your tax bill is over £1,000) you’ll normally be expected to make two payments on account each year. Each of these payments is usually half of your previous year’s tax bill. The first is due by 31 January in the tax year that it’s for and the second by 31 July.

If your tax bill is identical from year to year, this means you shouldn’t have any extra tax to pay when you submit your tax return. In reality, most freelancers’ income fluctuates and tax allowances vary meaning it’s rare for your tax bill to remain exactly the same from one year to the next. When you submit your tax return, the actual amount of tax due is calculated and you will either need to make a balancing payment or claim a refund to ensure you’ve paid the correct amount overall.

For example, imagine your tax bill for the 2021-2022 tax year is £4,000. You would need to make two payments on account, each of £2,000 for the 2022-2023 tax year. The first of these is due on 31 January 2023 and the second by 31 July 2023. If your tax bill for 2022-2023 turns out to actually be £5,000, you would pay the balance of £1,000 by 31 January 2023 (£5,000 bill minus £4,000 already paid) when you submit your tax return – plus £2,500 on account for the next tax year (half of the £5,000). Alternatively, if your bill was only £3,000, you’d be entitled to £1,000 rebate when you submit your tax return.

7. When do I pay my tax?

There are two deadlines for self-employed freelancers to pay tax: 31 January and 31 July. You will get a penalty of at least £100 if you miss a tax deadline, so make sure you’ve put these in your diary, highlighted in red and underlined three times!

If your last self-assessment tax bill was less than £1,000, you will need to pay all your tax by 31 January in the following year (ie the same date your online tax return is due). If tax bill was £1,000 or more, you need to make two payments on account – essentially advance payments of your expected tax bill. The first payment on account is due by 31 January in the tax year it covers and the second by 31 July. You will then need to pay any additional tax due when you submit your actual tax return for the year by the following 31 January.

8. How do I pay income tax and National Insurance?

You can pay your income tax and National Insurance contributions via your bank or building society, either in person, via telephone or online banking or by posting a cheque. Full details of how to pay using each method are set out on the HMRC self-assessment pages.

It’s important you leave time for your payment to reach HMRC before the deadline. For example, a direct debit can take up to five days to set up – and if the deadline falls on a weekend or bank holiday, the payment needs to reach HMRC by the last working day beforehand. You can check your payment has been received by logging on to your HMRC account.

9. Do I need to register for VAT?

You must register for VAT if your turnover is more than £85,000. If your turnover is less than £85,000 you can also register voluntarily, unless everything you sell is exempt.

If you register for VAT (either voluntarily or because you are over the £85,000 threshold) you must charge the right level of VAT on your services and submit VAT returns to HMRC.

10. How long do I need to keep my finance records?

As a self-employed freelancer, you’re legally required to keep a record of your business sales and expenses. You only need to provide a summary of these to HMRC as part of your tax return. However, they can ask to see your full records up to five years after the deadline to submit your tax return to check that you’ve completed your tax return correctly and are paying the right amount of tax. In practice, this means you must keep the records for almost seven years.

For example, your records for the 2022-23 tax year will run from 6 April 2022 to 5 April 2023. You need submit your tax return for this year by 31 January 2024 and you then need to keep your records for a further 5 years – meaning holding on to paperwork from April 2022 until 31 January 2029. Time to invest in a big filing cabinet!

11. What is a Unique Tax Reference (UTR)?

Your UTR might sound mysterious (or even vaguely medical). In fact, it simply stands for Unique Tax Reference and HMRC will automatically issue you with your UTR when you register as self-employed.

You need your UTR to complete your tax return and also if you want to apply for some forms of funded childcare such as the 30-hour offer for working parents, so keep it safe. If you’re not sure what your UTR is, check previous tax returns or any letters you’ve had from HMRC about your self-employment as it will normally be included as part of your reference.

12. Can I get tax-free childcare if I’m self-employed?

Yes! If you’re self-employed and have a child under the age of 11, you may be able to get up to £2,000 per year to pay towards the cost of approved childcare through tax-free childcare. Once you’ve set up your account, the government contributes £2 for every £8 that you pay in for your childcare, which can make a big difference to your overall budget.

To be eligible for tax-free childcare, both you and and your partner (if relevant) normally need to be working and earn more than the equivalent of 16 hours at the minimum wage per week. However, when you’re self-employed, you can average your income over a tax year – and the minimum earnings level only kicks in after your self-employment business has been running for 12 months or more meaning you can access tax-free childcare while you’re getting your freelance business set up.