Paying Tax For Freelancers And The Self-Employed Explained

No matter what point we are in the tax year, it’s never too early to start planning your taxes. As with employees, freelancers working as a sole trader must pay tax every single year. The main…

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No matter what point we are in the tax year, it’s never too early to start planning your taxes. As with employees, freelancers working as a sole trader must pay tax every single year. The main difference is that, unlike employed workers, sole traders are solely responsible for paying their taxes.

If you’re worried about making a mistake on your tax return or you simply don’t know where to start, look no further. Here, we cover everything you need to know about tax for the self-employed, including:

  • How to register with HMRC
  • How much you can earn from freelancing tax-free
  • The various tax bands, such as basic rate and higher rate
  • How to declare income and pay Income Tax

How do I register as self-employed?

If you didn’t file a Self Assessment tax return in the previous tax year, you’ll need to register with HMRC as self-employed. If you don’t register by the 5th October in your business’ second tax year, you could be liable to pay a penalty. To avoid this, it’s recommended to register for Self Assessment and Class 2 National Insurance as soon as possible.

You can register online using the form CWF1. Once you’ve registered, you’ll receive a letter from HMRC with your Unique Taxpayer Reference (UTR) number. You’ll then receive a second letter containing the activation code for your account.

All done? Great. You can start filing your returns and paying tax and National Insurance.

Personal Allowance: How much can I earn tax-free as a sole trader?

If you were previously employed or have been self-employed before, you may have already heard about the Personal Allowance. If you haven’t, it’s essentially the amount of tax-free income you’re entitled to receive each tax year. The Personal Allowance for the 2019/20 tax year was £12,500 and remains the same for the 2020/21 tax year.

This amount can increase with inflation, so make sure to look out for any changes for the 2022/23 tax year on the official HMRC website.

How do I work out my Income Tax rate?

If you earn more than the Personal Allowance, you’ll need to pay what’s known as Income Tax. The amount you have to pay each year completely depends on how much of your total income is above your Personal Allowance and how much falls within each tax band.

In order to pay Income Tax on the money you earn from freelancing, you’ll need to first calculate how much tax you owe.

The Income Tax rates and tax bands for the 2020/21 tax year are:

Band Taxable incomeTax rate
Personal AllowanceUp to £12,5000%
Basic rate£12,501 to £50,000 20%
Higher rate£50,001 to £150,00040%
Additional rateOver £150,00045%

While you don’t have to do this until you earn more than £1,000 in a tax year (known as the Trading Allowance), you can still choose to complete a tax return. To do this, you’ll need to register with HMRC and have a UTR number. Then check out our guide to completing a tax return here.

Once you’ve submitted your tax return, you’ll be given your tax bill. You can pay this through the HMRC portal, by post, or by BACS from your bank account.

How GoSimpleTax can help

There’s no denying that keeping on top of your taxes can be daunting, especially if you do it alone. If you’re struggling to complete your tax return, GoSimpleTax is here to help.

Our easy-to-use software makes the tax return process as simple as possible. We even have a mobile app available for iOS and Android that allows you to quickly input the relevant information as you go. What’s more, you can discover some of our software’s features as part of our freemium package.

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