Tax and finances for freelancers
As an employee of a company, your income tax, national insurance payments, student loan repayments and workplace pension contributions are all taken out of your paycheque before it is paid into your bank account. If you look at one of your payslips, you can see the breakdown. But when you choose to be self-employed it all becomes your responsibility to manage. Failing to keep on top of it can result in fines or even prison sentences, so it’s best to feel completely comfortable with this practice before making the jump.
If you are self-employed and working as a freelancer there are several taxes or payments you will have to understand
Income Tax is your main contribution to the UK. The first £11,850 of your income is tax-free, then it breaks into brackets. You pay 20% up to the first bracket (approximately £46,350), then 40% up to £150,000, and 45% on anything higher than that. The self-assessment tax return system will calculate this for you and there are many ways to claim tax back if you have paid more than you should have. If you’re earning in the higher brackets it’s sensible to talk to an accountant, at the lower bracket it’s more cost-effective if you can do it yourself. If you earn money from your self-employed work as well as salaried work you have to declare it all in your tax return and the total, minus your expenses, is your income.
National Insurance is the system that allocates funding to certain public benefits like state pension and the NHS. As a freelancer, you’ll have to organise these payments yourself. If you’re earning over the current bracket, you’ll need to pay this at the end of the tax year. However, if you’re earning under the limit, you can choose to pay it voluntarily. When you retire, you’ll only be eligible for the state pension if you have enough years logged of paying national insurance contributions.
Student Loan repayments will vary for everyone. You’ll only need to worry about this if you took out a student loan. If you’re employed, these payments will be taken from your paycheque but when you do your own tax return, you’ll need to organise this yourself. Your payment will be calculated based on your income and you’ll pay it alongside your national insurance and income tax.
- Value-Added Tax (VAT) is a 20% surcharge on goods and services from a larger business that goes straight to the government. If your business earns over £82,000 in a tax year you’re legally obligated to register for VAT.
The financial year runs from 1 April to 31 March, and you get until January of the next year to submit your tax return once the year ends.
Hear from freelancers across the industry about how they first learnt to file their taxes themselves:
If you want to freelance but can’t commit to doing all of the paperwork yourself, there are many accountants that will do this for you, and many that will even specialise in the industry that you work in. Prices can start at around £500-£1000 per year for qualified accountants, so it can be a big commitment, but you are likely to save enough from their work to cover their fees. Whether you hire an accountant or not a strong understanding of finances will help you price your business, manage your money and work efficiently.
Expenses for freelancers
When you submit your tax return you’ll also submit a total of your business expenses, which is then subtracted from your final tax bill. Basically, when you spend cash on your business, you don’t have to pay income tax on it. These regulations change slightly every year so it’s worth keeping records of all your outgoing expenses just in case you can claim them back at the end of the year.
The kind of thing that you can claim for varies depending on your industry, so we'd suggest looking on GOV.uk's current list of allowable expenses, but could include:
- buying stationary
- buying or renting equipment
- travel costs
- marketing costs
- heating and electricity costs if you work from home
Pensions for freelancers
There is no workplace pension when you’re self-employed. In most companies, employers will offer to take a cut of your pay cheque, add their own contribution, and store it in an investment fund that you can access when you reach retirement age. This is not an option when you’re a freelancer.
The alternative is a Self-Invested Personal Pension (SIPP), which is a pension plan that allows you to choose and manage the amount of money you invest in your own pension. Some freelancers will instead invest in property, or their own business, which they will sell to pay for their retirement.
The flipside is that many freelancers in the creative industries work a lot longer than other industries, offering expert services with their experience, or serving in consultancy or management roles. If you’re skilled in a specialised profession such as editing, pattern cutting or 3D modelling, you may find that you’ll always be in demand.
Invoicing for freelancers
An invoice is a list of goods and services provided with a statement of the sum money you are owed for them. When you’ve finished your work (or at any milestone as set out by your contract) it’s time to send an invoice so you can get paid. While this can take many forms and can be as simple as a single side of A4, there are some pieces of information that need to be included:
- the word “Invoice”
- you or your company's name and address
- the receiver's name and address
- a description of the work undertaken
- your Unique Tax Reference number (this will be given to you when you register as self-employed with the government)
- the date the goods or services were provided
- the date of the invoice
- the total amount being charged
- the total amount of VAT (if applicable)
- Payment Terms ( the requirements, as set out in your contract, that describes how you are to be paid). A common payment term is 'Net 30', which means there are 30 days between receiving the invoice and payment being due. You may also see Net 60 or Net 90 (though a lot less often). Your payment terms, and whether you bill hourly, daily or by the entire project comes down to your preference and the amount of work you do, but you should set this up before the contract begins. It’s impossible to enforce late fees after a contract has been signed.
Tax and finance FAQs for freelancers
What do I do if clients don't pay me on time?
Try to resolve it amicably if you can. If you have a late payment clause in your contract refer to that. If it looks like the client has no intention of paying you, your clause can give you backup in small claims court or with a debt collection service. Most of the time when clients are threatened by this they will agree to pay.
If the company that owes you payment is being liquidated, get in touch with the liquidator as soon as you can (it will usually be a specialist legal or accounting firm). Let them know all the details about your work and make sure they’re aware of your outstanding invoice.
How should I keep records?
A traditional paper folder is a tried and tested method. Web services like Dropbox can save you some space and stress. You’ll need to keep all your tax and invoice records long-term in case HMRC wants to inspect them.
How much money should I put aside to pay my tax bill?
You should save at least 20% of every paycheque for your tax bill. However, you may want to bump this up to 30% or 40% to make sure that you can cover your income tax bill, national insurance payments and student loan repayments comfortably. There’s nothing worse than receiving the bill and realising you can’t pay it.
HMRC can offer payment plans if you can’t afford the entire bill, it’s not a great idea to allow this to eat into your earnings over the next year when you’ll still have to pay the current year’s tax bill on top. Smart freelancers save a little too much for their tax bill and use the surplus to go on holiday every year.
Should I join a union?
Unions (such as BECTU) can support you in disputes with industry organisations, offer you legal protection, tax advice, one-to-one support and other services. However, joining a union is a personal choice and you will have to decide whether it fits into your career.
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