Calculate self-em­ploy­ment taxes

Freel­an­cing is a popular choice for many workers in the UK, and for tax purposes, freel­an­cers are clas­si­fied as self-employed in­di­vidu­als. Depending on the nature of your business, you may be subject to different taxes. However, all self-employed in­di­vidu­als are required to pay income tax and National Insurance con­tri­bu­tions (NICs). Ad­di­tion­al taxes may apply depending on the type of work you do, which will be discussed later.

Which taxes apply to freel­an­cers?

Un­der­stand­ing which taxes apply and how to file them correctly is essential for staying compliant with HMRC. We break down the key taxes freel­an­cers need to be aware of, including income tax, National Insurance con­tri­bu­tions, VAT, and other potential ob­lig­a­tions based on your business structure. Stay informed and organised to ensure smooth tax filings and avoid penalties.

Income Tax

Freel­an­cers in the UK are required to pay income tax on their profits, which are cal­cu­lated as total income minus allowable business expenses. The UK uses a pro­gress­ive tax system, meaning the more you earn, the higher the per­cent­age of tax you’ll pay on the income within each tax band.

• Personal allowance: The first £12,570 (for 2024/25) of your income is tax-free.
• Basic rate: You pay 20% on income between £12,571 and £50,270.
• Higher rate: You pay 40% on income between £50,271 and £150,000.
• Ad­di­tion­al rate: You pay 45% on income over £150,000.

What to bear in mind:

• You’ll need to file a Self-As­sess­ment tax return each year to report your income and expenses.
• The deadline for sub­mit­ting your Self-As­sess­ment is January 31 for online sub­mis­sions.

National Insurance Con­tri­bu­tions (NICs)

Self-employed in­di­vidu­als in the UK also pay National Insurance (NI) con­tri­bu­tions. These con­tri­bu­tions are split into Class 2 and Class 4 NICs:

• Class 2 NICs: Payable if your profits are over £6,725 (for 2024/25). The rate is £3.45 per week.
• Class 4 NICs: Payable if your profits exceed £12,570. The rate is 9% on profits between £12,570 and £50,270, and 2% on profits above £50,270.

What to bear in mind:

• NICs are used to fund state benefits such as the NHS, pensions, and un­em­ploy­ment benefits.
• Class 2 NICs are paid auto­mat­ic­ally through the Self-As­sess­ment system, while Class 4 NICs are cal­cu­lated alongside income tax.

VAT (Value Added Tax)

If a freel­an­cer’s turnover exceeds £85,000 in a 12-month period, they must register for VAT. VAT is charged on most goods and services, and freel­an­cers will need to collect VAT on behalf of the HMRC from their clients.

There are different VAT schemes available, including:

• Standard VAT rate: 20%
• Reduced VAT rate: 5% (for certain goods and services)
• Zero-rated VAT: 0% (for certain items like food, books, and children’s clothing)

What to bear in mind:

• Even if you’re under the £85,000 threshold, you can vol­un­tar­ily register for VAT if it benefits your business.

Cor­por­a­tion Tax (if operating as a limited company)

If you choose to operate as a limited company, the business will be required to pay cor­por­a­tion tax on its profits. For the 2024/25 tax year, the cor­por­a­tion tax rate is:

• 19% on profits up to £50,000.
• 25% on profits over £250,000.
• A marginal rate applies to profits between £50,000 and £250,000.

What to bear in mind:

• Operating as a limited company has tax ad­vant­ages, but it comes with ad­di­tion­al reporting re­quire­ments and ad­min­is­trat­ive tasks.

Other Taxes

Freel­an­cers may encounter ad­di­tion­al taxes depending on their type of business, industry, or location. Some of the common taxes include:

• Business Rates: If you operate from com­mer­cial property, you may be liable for business rates, which are a tax on the value of the property you use for your business.
• Capital Gains Tax: If you sell assets (e.g., equipment, property) as part of your business, you may need to pay Capital Gains Tax on any profit made.
• Dividend Tax: If you’re a director of a limited company and take dividends from the company’s profits, you may need to pay Dividend Tax on the amount received.

How to file self-em­ploy­ment taxes step by step

If you are self-employed and want to submit your own tax returns without the help of a tax pro­fes­sion­al, there are a few things to keep in mind. Simple tricks and tips can save a lot of work and stress at the end of the year. In the following step-by-step in­struc­tions, we explain how self-employed persons can pay their taxes correctly without too much effort.

Document revenues and ex­pendit­ure

The most important thing when filing a self-em­ploy­ment tax return is to have a clear, com­pre­hens­ive overview of your financial year. While there is no law requiring business owners to keep book­keep­ing records, it is in their interest to adhere to Generally Accepted Ac­count­ing Practice (UK GAAP) to run their business smoothly, submit their taxes ef­fect­ively, and explain them­selves should they become the subject of an audit by Her Majesty’s Revenue and Customs (HMRC). The same goes for the self-employed. The clearer your records are through­out the year, the easier it will be to submit your tax return at the end of the tax period.

As a rule, two Excel tables are suf­fi­cient to clearly document income and ex­pendit­ure: one for revenue and one for ex­pendit­ure. These tables should include the date, service provider/sales­per­son, service or product de­scrip­tion, gross amount, and document reference number (for receipts, invoices you have kept as proof of purchase/sale) in separate columns. If you are also liable for VAT, you can create columns for net amounts, VAT rates, and cal­cu­lated VAT rates. This will help you keep track of things and save work in the long run.

Collect and sort documents

Having revenue and expenses is one thing, being able to keep track of them is another. Business activ­it­ies always need to be doc­u­mented, and it is better to have too many than too few. Sup­port­ing documents should include receipts for cash payments, transfer receipts, and delivery notes, as well as pay slips, fuel, and en­ter­tain­ment receipts.

While there is no law stip­u­lat­ing what kind of book­keep­ing system you use, it can often be easier and more accurate to use a digital filing system, as well as retaining your paper slips. Re­cord­keep­ing requires a good or­gan­isa­tion system right from the start, and it should be user-friendly so that you can add new documents to your database as you get them. To do this, programs create different folders where collected documents are sys­tem­at­ic­ally filed.

If your business is operating with a cash ac­count­ing method, then two core folders are usually suf­fi­cient:

• Account statement folder, filed chro­no­lo­gic­ally; the cor­res­pond­ing documents are filed behind each account statement (unless you have a monthly cost and can file a monthly copy of a lease agreement, etc.)
• Folder for cash documents, in sequence with a document number

If profit is instead de­term­ined through the accrual ac­count­ing method (profit and loss account and balance sheet), then a different method of document or­gan­isa­tion is re­com­men­ded:

• A/R invoice folder, se­quen­tial with document number
• Incoming invoice folder, se­quen­tial with document number
• Account statement folder, sorted chro­no­lo­gic­ally
• Cash book folder including sup­port­ing cash documents, sorted and doc­u­mented chro­no­lo­gic­ally

Since receipts need to be kept for several years, and machine receipts fade quickly, they should be kept together with backup copies if possible.

Calculate profit: Cash method or balance sheet?

The amount of income tax you pay depends, among other things, on how much taxable profit you have made – so one of the first questions that arises in a tax return is how to correctly calculate your profit. There are two options for cal­cu­lat­ing profit: Profit is either de­term­ined through the accrual ac­count­ing method using a profit and loss account and a balance sheet, or by the cash method – where expenses aren’t re­cog­nised until the money is actually paid out.

As a self-employed person, you can enjoy a few ad­vant­ages when it comes to sub­mit­ting taxes. While larger cor­por­a­tions and in­di­vidu­als may have other specific ac­count­ing ob­lig­a­tions when it comes to proving profits, a simple profit report is suf­fi­cient for the self-employed. A profit report simply refers to the amount of revenue from sales that exceeds running costs of the business, and can be as­cer­tained by simply sub­tract­ing your business outgoings from your business earnings. Depending on whether your profits are higher than your ex­pendit­ures, you fill out different sections of your self-employed tax return.

There are def­in­itely ad­vant­ages and dis­ad­vant­ages to working out net profit from cash-based ac­count­ing, and using the accrual method with a balance sheet and profit and loss margins. Depending on how complex your business’ structure is, and how con­sist­ent your profits are, both options can be be­ne­fi­cial.

What can I deduct?

Car expenses, office supplies, pur­chas­ing goods, travel expenses, rent (for business premises), employee wages – there are many cat­egor­ies of expenses that the self-employed can deduct from their tax payment, since many operating expenses can be fully or partially deducted from income. This reduces taxable income and the amount of income tax to be paid. The self-employed have a pretty wide scope here, but also run the risk of having their expense claims denied.

When it comes to de­term­in­ing profits, the self-employed should always take into account which items can be deducted from their income. Typical costs that can be fully or partially deducted include:

• Office supplies, books
• Rent (for business premises)
• Training and (relevant) edu­ca­tion­al costs
• Wages paid
• Cars and other fixed assets liable to de­pre­ci­ate
• In­di­vidu­al re­tire­ment plans (IRAs)
• En­ter­tain­ment costs
• Travel expenses

Fill out your forms and submit self-employed tax returns

Self-employed people have the option to submit their taxes elec­tron­ic­ally (through HMRC’s free Self As­sess­ment online service), through the post, or through a re­gistered tax pro­fes­sion­al.

Which forms exactly do you need to fill out? All self-employed people must submit yearly self-as­sess­ment tax returns to ensure that their National Insurance and income taxes are being paid. To do this, you are required to submit an SA100 form (Tax return for self-as­sess­ment).

There are several other forms you may need to fill out, depending on what kind of income your business makes. Here is a full list of sup­ple­ment­ary pages.

Once you have completed these forms, the tax return needs to be filed within the deadline. Paper tax returns must be submitted by 31st October, and online tax returns are due on 31st January. If you submit your tax return too late, you will incur a £100 fine.

Lodge an appeal, if required

Once you submit your tax return, there is nothing to do but wait. Forms submitted elec­tron­ic­ally are generally processed within 21 days, and mailed returns can take from 6-8 weeks to be processed.

Once you receive your tax bill from HMRC, it is good business practice to have each tax as­sess­ment checked by a pro­fes­sion­al. After all, even tax officials can make mistakes. Once you receive a de­term­in­a­tion from HMRC, you have 30 days to launch an appeal. This must be done in written form, and your appeal request should be posted to your local HMRC office, and should include your name, tax reference number, issues with the decision, and what you believe the correct tax cal­cu­la­tion to be. You must also sign the document.

Please refer to the legal dis­claim­er for this article.