Important Update
According to a study done by Daniel Clark and published by Statista, as of 2019, 3.31 million men and 1.66 million women living in the UK were self-employed. Those figures represent an increase of 951 thousand for men, and 762 thousand for women, since the year 2000.
Furthermore, as of 2019, it is estimated that freelancers generate up to £275bn to the national economy. That is an indication that self-employment is a sure way to gain economic stability for many workers.
Do you plan to join this increased workforce of self-employed people as a freelancer? Read on to discover how to work legally as a freelancer In the UK.
As a freelancer, you will essentially be running a business, and that means you need to register it. You can choose to register as a sole trader, a partnership, or a limited company. Here is a summary of their differences and benefits.
You will be running your freelance trade/business as an individual. The main advantage of a sole trader is you get to keep all profits after paying your taxes. However, you also have to bear all losses that your freelance business makes. You are freelance to register an assumed business name, or just use your name.
A partnership business model works the same way as a sole trader. The exception is you share in the profits and losses with at least one other person or business entity. All profits are shared after each partner has paid the taxes due on their share of profits.
When running your freelance business as a Limited Company, you keep your personal finances separate from the company finances. You need to have at least one director and one shareholder to form a company.
You also need to have articles of association for you to register a company.
Your next step to work as a freelancer in the UK is registering as self-employed with Her Majesty’s Revenue and Customs (HMRC). Now that you are working for yourself, you will be responsible for submitting your own taxes.
It helps if you start early, and registering your freelance trade or business is the first step.
All the three forms of businesses we discussed above are eligible for registration. The deadline for registration, when actively working as a freelancer in the UK is 5 October, of the second year of business in the UK.
To register your freelance business or trade, you need to go to HMRC’s website.
Step 1:
Visit the HMRC website and use the Employment Status Indicator to determine if your type of work is considered self-employment.
Step 2:
Create your online account with gov.uk, making sure you clearly indicate how you are doing your freelance business.
Step 3:
Wait for details of your registration, which will be sent via post to your residential address.
Step 4:
Use the Government Gateway details you will receive to complete your registration. You may also need your business details such as contact details and trading name.
Step 5:
Keep your registration details in a safe place, because you will need them to pay and file your taxes online.
The types of taxes you are going to pay will depend on the type of business or self-employment you are running as a freelancer. Generally, if you registered as a sole proprietorship, you will only pay Income Tax. Here is a summary of the different types of taxes for freelancers in the UK.
You pay the Income Tax along with the National Insurance, through the annual Self Assessment return. If you registered as a sole proprietorship, this is the tax you will be paying. The exception is if you have also registered for the VAT tax.
If you registered as a Limited Company, then as a director or shareholder, you will be paying a Dividend Tax. This is done through the Self Assessment return, and it is not as part of company taxes.
If you are running your freelance business as a limited company, you will be paying corporate tax. Corporate tax is not part of your income tax, and it is filed on HMRC, separately.
If you have also registered for VAT, which you would if you sell any products/services that qualify for VAT, then you must complete a quarterly VAT return. The current VAT threshold is £85,000, and any business with a turnover above £85,000, qualifies for VAT.
You may do it on the HMRC’s Tax Digital scheme website.
AS a freelancer in the UK, you just submit your taxes online before 31 January, the next tax year. If you choose to file your taxes through paperwork, the deadline is 31 October, of the current tax year.
The deadline for paying the taxes you owe, after you submit your tax return is 31 January, of the next tax year. In that regard, you need to pay your 2019-20 tax, by 31 January 2021.
There are fines and penalties for late payment of tax, so you should make sure you adequately prepare to pay taxes on time.
You will need to invest in the compatible software, which can send digital tax returns. The deadline for doing it was 31 March 2020. The HMRC has provided a list of compatible software that you may use to make tax returns digitally.
Some notable compatible tax software includes:
As a freelancer, one of the benefits of registering with HMRC is you can deduct your business expenses from your business income. HMRC taxes your self-employment profits only, instead of turn-over. That makes it easy to offset the initial cost of setting up your freelance business.
You can deduct expenses such as office rent, stationery, and office equipment such as computers, printers, and cameras. You can also deduct bills such as the internet, car/truck hire, electricity, and phone. However, anything that you deduct must be for business use only.
In that regard, it is best to have an office or rent office space, if you plan to make such deductions. When there are expenses that you share with your business, then you cannot deduct them from your profits.
The National Insurance rates are based on how much you earn as a freelancer. If your self-employment profits exceed £6,475, you will pay Class 2 National Insurance, directly to HMRC. Class 2 National Insurance has a weekly flat rate of £3.05, after self-employment registration.
In case your freelance profits range between £8,632 and £50,000, you will be paying Class 4 National Insurance. Class 4 National Insurance rate is 9% and an additional 2% for profits above £50,000.
The basic income tax rate for freelancers is 20%, on all earnings above the personal allowance, but below the upper limit (£37,500) of the basic rate, for the 2020/21 tax year.
For earnings above your personal allowance that exceed the upper limit (£37,500) of the basic rate, you pay an income tax rate of 40%, until you reach the upper limit of £100,000, for the tax year 2020/21.
If you also have an income from your employer, whose tax is already paid, you must disclose it. You do that when filing your Self Assessment tax return.
With all the taxes and expenses that you have to deal with, freelancer insurance is probably the last thing in your mind. However, it is important that you arrange to get your freelancer insurance. It will protect your income and reputation, in the event of a mistake.
According to the House and Safety Executive (HSE), individuals pay the majority of work-related injuries’ costs. For instance, in 2017/18, individuals paid £8.6 billion in work-related injury or health costs, while the government and employers paid £3.4billion and £3.0 billion respectively.
Whether you work from home, or offer your services on the premises of your clients, having an insurance cover will give you, and your clients, peace of mind. Mistakes can happen, no matter how careful, or professional you are with your work.
For instance, as a freelance writer, having a self-employment insurance cover can protect you in case your content causes your client financial loss. That can happen if they get sued for publishing misleading content, or professional negligence.
Your professional indemnity insurance can cover costs such as legal bills, even if you are innocent. The same applies to a cleaning business, accounting business, among other freelance services you may be offering.
We hope that you found this guide on working as a freelancer in the UK to be informative, and you will have a great time running your freelance business. What’s your experience freelancing in the UK? Please share it in the comments section below.
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