How to Pay Tax as a Freelancer or Self Employed in UK

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As a freelancer or self-employed individual in the UK, understanding how to pay tax is essential for managing your finances and staying on the right side of HM Revenue & Customs (HMRC). Unlike traditional employees who have their taxes deducted automatically through the PAYE (Pay As You Earn) system, freelancers and the self-employed must navigate the tax system independently. This means you are responsible for reporting your income, calculating your tax liabilities, and ensuring you pay the correct amount of tax on time. 

In this guide, we’ll walk you through the basics of paying tax as a freelancer or self-employed individual in the UK, helping you understand your obligations and avoid potential pitfalls along the way.

Do Freelancers Pay Taxes?

Freelancers in the UK are obliged to pay taxes on their income. Unlike employees on PAYE (Pay As You Earn) schemes, freelancers and the self-employed manage their taxes independently. This entails reporting income, calculating tax liabilities, and ensuring timely payment directly to HM Revenue & Customs (HMRC). 

Do Freelancers Pay Taxes

Failing to fulfill these obligations can lead to penalties and interest charges. Therefore, it’s crucial for freelancers to understand and meet their tax responsibilities promptly to avoid any potential issues with HMRC.

How Much Income Tax Do Freelancers Pay

As a freelancer in the UK, the amount of income tax you pay depends on your total taxable income for the tax year. All your taxable income, including earnings from freelance work, rental income, dividends from shares, and pension payments, are added together to determine your total taxable income. Here’s a breakdown of the Income Tax bands for the 2023/2024 tax year:

Income Tax Band

Taxable Income Range

Income Tax Rate

Personal Allowance

Up to £12,570

0%

Basic Rate

£12,571 to £50,270

20%

Higher Rate

£50,271 to £125,140

40%

Additional Rate

Over £125,140

45%

Your Personal Allowance is the amount of income you can earn before you start paying income tax. For the tax year 2023/2024, the Personal Allowance is £12,570. 

However, if your net income exceeds £100,000, your Personal Allowance decreases by £1 for every £2 of net income over £100,000. If your net income is over £125,140, you won’t receive any Personal Allowance.

How to Pay Tax as a Freelancer UK?

Paying tax as a freelancer in the UK involves several steps to ensure you meet your obligations to HMRC. Here’s a simple guide to help you navigate the process:

How to Pay Tax as a Freelancer UK
  • Register as Self-Employed: If you’re starting out as a freelancer, you need to register as self-employed with HMRC. You can do this online via the HMRC website.
  • Keep Accurate Records: It’s essential to keep detailed records of your income and expenses throughout the tax year. This includes invoices, receipts, and bank statements.
  • Submit Your Tax Return: You’ll need to complete a self-assessment tax return each year to declare your income and expenses to HMRC. The deadline for submitting your tax return is 31st January, following the end of the tax year.
  • Pay Your Tax Bill: Once you’ve submitted your tax return, HMRC will calculate how much tax you owe based on your declared income. You’ll then need to pay your tax bill by the deadline, which is also 31st January.
  • Payment Methods: There are several ways to pay your tax bill, including online or telephone banking, direct debit, or by cheque. HMRC will provide you with payment details once your tax return has been processed.

How Self-Employed Tax Works

Understanding how tax works when you’re self-employed is crucial for managing your finances effectively. Here’s a simple breakdown of how self-employed tax works using an example:

For Example:

Imagine you’re earning £35,000 as a salaried employee and £20,000 as a sole trader in the 2023/24 tax year. Here’s how your income tax would be calculated:

Tax Year

2023/24

2024/25

Income from an employer

£35,000

£35,000

Profits from sole trade (self-employment)

£20,000

£20,000

Total income

£55,000

£55,000

Personal allowance

(£12,570)

(£12,570)

Total taxable income

£42,430

£42,430

Income Tax paid at the basic rate (20%)

£7,540

£7,540

Income Tax paid at higher rate (40%)

£1,892

£1,892

Total Income Tax paid

£9,432

£9,432

In this example, you would pay an Income Tax of 20% on all earnings above your personal allowance (£12,570) and below the upper limit of the basic rate (£37,700 for the 2023/24 and 2024/25 tax years). You would also pay an Income Tax of 40% on all earnings above the basic rate limit until you reach the higher rate limit (£100,000 for the 2023/24 and 2024/25 tax years).

When you prepare your annual Self Assessment tax return, you will disclose the tax already paid on your earnings from your employer (in this example, £35,000 would have been taxed under PAYE arrangements). HMRC will then calculate the amount of tax you owe on your profits from self-employment (£20,000 in this example).

This breakdown should help you understand how self-employed tax works and what you can expect when it comes to calculating and paying your taxes as a sole trader in the UK. For more detailed information on UK Income Tax rates and thresholds, check out our tax rates and thresholds article. Additionally, you can use our income tax calculator to crunch some numbers and understand how much you’ll pay based on your own self-employed earnings.

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How to Declare Self-Employed Income

Declaring your self-employed income to HM Revenue & Customs (HMRC) is a straightforward process, but it’s essential to get it right to avoid any penalties or fines. Here’s a simple guide to help you declare your self-employed income:

Firstly, ensure you’re registered as self-employed with HMRC. You can easily register online via the HMRC website. Once registered, it’s crucial to keep accurate records of all your income and expenses throughout the tax year. This includes invoices, receipts, and bank statements. Next, you’ll need to complete a self-assessment tax return each year to declare your self-employed income to HMRC. 

The deadline for submitting your tax return is 31st January, following the end of the tax year. When completing your tax return, make sure to declare your total income from self-employment as well as any allowable expenses. Once your tax return is complete, submit it to HMRC either online or by post.

By following these steps and declaring your self-employed income accurately and on time, you can ensure that you meet your tax obligations and avoid any potential issues with HMRC.

How to Pay Tax Self-Employed?

As a self-employed individual in the UK, paying tax is your responsibility. Here’s a simple guide to help you understand how to pay tax when you’re self-employed:

  • Register for Self-Assessment: If you haven’t already done so, you need to register for Self-Assessment with HM Revenue & Customs (HMRC). You can do this online via the HMRC website.
  • Keep Accurate Records: It’s crucial to keep detailed records of all your income and expenses throughout the tax year. This includes invoices, receipts, and bank statements.
  • Complete Your Self-Assessment Tax Return: You’ll need to complete a self-assessment tax return each year to declare your self-employed income to HMRC. The deadline for submitting your tax return is 31st January, following the end of the tax year.
  • Calculate Your Tax Liability: HMRC will calculate how much tax you owe based on your declared income and allowable expenses. You can do this using the self-assessment form or online through the HMRC website.
  • Pay Your Tax Bill: Once you’ve calculated your tax liability, you’ll need to pay your tax bill by the 31st January deadline. There are several ways to pay, including online or telephone banking, direct debit, or cheque.

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Closing Note

Understanding how to pay taxes as a freelancer or self-employed individual in the UK is crucial for managing your finances effectively and staying on the right side of HMRC. By following the steps outlined in this guide, you can ensure that you meet your tax obligations and avoid any potential issues with HMRC. 

Remember to register for Self-Assessment, keep accurate records, complete your tax return on time, calculate your tax liability correctly, and pay your tax bill by the deadline. With careful planning and attention to detail, you can navigate the UK tax system with confidence and peace of mind.

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