Many freelancers will ‘test the water’ by doing some freelance work around their permanent job before moving to self-employment. But what are the tax implications of freelancing on the side?
Always check your contract
It’s unlikely, but some employment contracts may prohibit you from freelancing or taking on additional employment on the side. Before considering freelancing you should check that this is not written into your contract as you do not want to jeopardise your job or potentially damage your reputation in the industry.
What expenses can you claim as a sole trader?
A sole trader is someone who works as self-employed without operating through their own company or partnership. As a sole trader, you can offset certain business expenses against your income and you will only be taxed on your self-employed profits. The general rule of thumb is that you can only claim expenses on costs that are wholly and exclusively incurred for business.
Declaring income earnt from freelancing to HMRC
If you get paid more than £1,000 during a tax year and plan to further your freelancing career, you need to register online and complete a self-assessment tax return to declare your income.
You can register here.
You are required to declare your freelance earnings each year by the 31st January deadline following the end of the tax year on 5th April. Unlike the income earnt from your permanent employment, the money you earn from freelancing is untaxed and it will need to be declared to HMRC.
The amount of tax and National Insurance Contributions (NICs) that are due will depend on how much you earn as a freelancer and how much you are paid in your full-time job.
What Income Tax are you required to pay as a freelancer?
Your Income Tax will be calculated on your total earnings – combined income from employment and sole trader profits. You will need to pay Income Tax on any income above the personal allowance of £12,570 for the 2023/24 tax year.
The Income Tax Rates for the 2023/24 tax year are as follows:
- Basic rate (20%) tax is due on income up to £50,270
- Higher rate (40%) is due on income from £50,270-£125,140
- Additional rate (45%) is due on income of over £125,140
When you file your self-assessment tax return, you will disclose the tax already paid on any earnings received from full or part-time employment via PAYE. HMRC will then work out the amount of tax due on your profits from freelancing when you submit your self-assessment tax return.
Please be aware that if the profits earnt from freelancing push your total earnings into a higher rate tax band, you will be required to pay the higher rate tax.
How much National Insurance should you pay as a freelancer?
Class 2 NICs are a fixed weekly amount – £3.45 per week for the 2023/24 tax year if you have made sufficient profits. You are required to pay Class 2 NICs if your earnings exceed the Lower Profits Threshold which is £12,570 for the 2023/24 tax year. If your profits are below the Small Profits Threshold (£6,725 for the 2023/24 tax year) then you can choose to pay voluntary Class 2 NICs.
Class 4 NI – which is charged at 9% – will also be due on self-employed profits between £12,570 and £50,270. For all profits greater than £50,270 the Class 4 NI drops to 2%. Your Class 4 NI will be worked out when you submit your self-assessment tax return.
For more information about self-employed NIC rates, please visit the government’s website.
Register for VAT
If your total VAT taxable turnover is more than £85,000 in the previous 12 months then you will be required to register for VAT. Until you reach that threshold it is entirely up to you whether you register or not.
If you register for VAT as a sole trader the business will be registered in your name, unlike limited companies which are registered in the name of the company.
Have you considered operating through your own limited company?
As a sole trader, your business is not a separate legal entity to you. This means you are responsible for any debt or losses incurred by the business. However, if you have a successful freelancing career you can keep all your business’ profits after the tax has been paid.
It may be worth considering setting up your own limited company as it separates the company’s assets and liabilities from your own. Plus, you will still have complete control of your businesses financial and legal decisions.
Fusion Business Services can support you in your freelancing career with our range of bespoke and all-inclusive accountancy services. If you are unsure which business set-up you are more suited to, why not speak to one of our friendly professionals for a free and impartial consultation? You can schedule a consultation here or give us a call at 0800 2294020.
