So, you’ve decided to take the plunge, work for yourself and become a freelancer. Going freelance is extremely exciting and provides you with flexibility being employed can’t give.

However, by becoming self-employed, there are different rules and regulations that govern the amount of tax you pay and when. Fortunately, with this guide, we’ll explain everything you need to be aware of when it comes to paying tax as a freelancer.

Company Formation

The first decision you need to make is the type of company your freelance business will be. This is critical, as it dictates the amount of tax you will pay. You have essentially two options, sole trader or limited company.

As a Sole Trader, there is less paperwork as you don’t have to register with Companies House. As a Limited company, the company is separate to you, so you pay tax as both an employee and as a Director (assuming you pay yourself Dividends).

For freelancers, the most common option is to become a Sole Trader. In total, there are around 3.5 million Sole Traders throughout the UK With that in mind, the tax information within this guide is geared towards Sole Traders.

First Steps As A New Freelancer

Firstly, you’ll need to fill out the HMRC self-assessment form. This lets the taxman know that you are now self-employed. It is important you do this as soon as possible, otherwise you could incur penalties.

Next, you can register your Sole Trader company for VAT. Note, this is only a requirement if you turnover £85,000 or more in a tax year. You can still do this if you turnover less than £85,000, but it is not a requirement. It may still be a good idea, as it adds credibility to your company and allows you to claim VAT for any purchases pertinent to your company.

Income Tax

The amount of tax you pay depends on your company’s profits. Initially, you are allowed £12,500 which is tax free. This is known as your personal allowance. If you are a high-earner, and earn over £100k, then your personal allowance is reduced to £7,500 tax free.

If you earn between £12,500 and £50,000, then you will be taxed on that portion at a rate of 20%. If you earn between £50,001 and £150,000, you’ll pay tax at a rate of 40% on that portion of your earning. Finally, if you earn over £150,000, you’ll pay tax at 45%.

National Insurance

As well as income tax, you’ll also need to ensure you pay the correct national insurance contributions. Like Income Tax, this is based on your earnings. Below is a breakdown of National Insurance contributions:

Class 1 NIC: This is paid on your employment earnings.

Class 2 and 4: This is paid on your self-employed profits. If you earn more than £6,475 profit a year, you will pay class 2 NIC, if you earn more than £9,500 you will also pay class 4 NIC.


Knowing what you can and can’t expense is crucial for freelancers, as it has an impact on your tax contributions. In short, ensuring you claim on allowable expenses is critical as it will reduce the amount of tax you need to pay. This is because it will reduce your profits. So, for instance, if you do any travelling for business purposes only, you can claim the mileage as a business expense. This also goes for marketing, salaries, business insurance, vehicles related to your business, office supplies and bills and business equipment.

How To Stay On Top Of Your Business’ Financials

Doing the company accounts and staying on top of your tax can be difficult when you’re a freelancer. After all, you want to focus on your business, not the taxman. That’s why it is a good idea to employ an accountant to help you manage your tax returns and ensure you’re claiming for everything you can claim for. Plus, an Accountant will ensure you remain fully compliant, meaning you won’t incur any HMRC penalties.

Anthony Hanson is the founder of iFinance Department, an online accountancy aimed at helping small and medium businesses grow through the combined power of cloud technology and true financial expertise.

Freelancer stock photo by Andrei_R/Shutterstock