Are you ready to register as a freelancer but still unsure how it differs from being employed? The biggest difference is the tax system you'll use. So, in this chapter, we’ll explore it in more depth, as well as how to pay towards state benefits and explain whether or not it’s necessary to register for VAT.
What is Her Majesty’s Revenues and Customs (HMRC)?
HMRC is an agency of the UK government responsible for collecting taxes from individuals and companies.
Your taxes help to pay for public services, such as the National Health Service, schools and the welfare system.
Understanding tax: self-assessment vs PAYE
As an employee, your company uses your personal tax code to calculate the amount of tax you owe. The amount is deducted from your salary every month and paid to the government. This system is called Pay As You Earn (PAYE).
Freelancers use a self-assessment system, which is different. In this system, you are responsible for calculating and paying your own tax (automatically calculated for you if you file an online tax return). Instead of paying monthly, you'll generally make your payments in one or two annual instalments.
The UK tax year is from 6th April to 5th April the following year. The amount of tax you pay depends on the amount you earn. The first £12,570* made each year is considered your personal allowance and not taxed.
Income tax rates and thresholds
Tax Rate (Band) | Taxable income | Tax Rate* |
Personal allowance | Up to £12,570 | 0% |
Basic rate | £12,571 to £50,270 | 20% |
Higher rate | £50,271 to £125,140 | 40% |
Additional rate | over £125,140 | 45% |
If you’re lucky enough to earn £60,000, you won't pay tax on the first £12,570, which means you’ll have £47,430 of taxable income. You’ll be charged 20% on the first £37,699 (ie £7,540). You’ll then be taxed at the higher rate of 40% on the remaining £9,730 (ie £3,892). The total tax you owe will, therefore, be £11,432. Despite falling within the higher tax rate, you are NOT charged 40% on your entire salary.
Check you are self-employed
HMRC identifies you as self-employed if you:
Run your business for yourself and take responsibility for its success or failure
Have several customers at the same time
Can decide how, where and when you do your work
Can hire other people at your own expense to help you or to do the work for you
Provide the main items of equipment to do your work
Are responsible for finishing any unsatisfactory work in your own time
Charge an agreed fixed price for your work
Sell goods or services to make a profit, including through websites or apps
(Amazon marketplace, eBay or Etsy for example)
You can also check your status if you’re unsure whether your activities officially classify you as self-employed. You’ll be guided through a short questionnaire that will determine your employment status and provide an explanation for the result.
Register for self-assessment
Registering for self-assessment is straightforward. You’ll be taken to the screen below where you can set up an online account. You’ll then be prompted to fill in some details about you and your business.
Once registered, you’ll be sent an activation code within 10 days, which you’ll need the first time you log in online. You will also separately receive:
A Unique Taxpayer Reference number (UTR). You must keep this code safe. It’s a 10-digit reference number that uniquely identifies you. You’ll have to quote it in any correspondence you have with HMRC.
A User ID and Password . This gives you access to the Government Gateway system you’ll use to submit your tax return. You’ll need both the user ID and password each time you access your online account.
Simple, right? You’re now officially registered as self-employed. It means you’ll have to submit an annual tax return and declare your earnings on paper by 31 October, or online by 31 January each year. If you opt to submit online, your tax will be calculated for you.
Understanding National Insurance contributions
National Insurance contributions (NICs) are another form of tax paid by all workers and employers in the UK. The self-employed pay these annually.
They help to fund benefits such as state pensions, maternity pay and unemployment benefits. There are four main ‘classes’, ranging from 1 to 4. The two types specifically for the self-employed are Class 2 and 4:
You'll pay make class 2 contributions to qualify for benefits like the State Pension.
You’ll pay class 2 and class 4 contributions if your profits are £12,570 or more a year.
In order to qualify for the full state pension, you’ll need to have contributed 35 years of NICs. You can check your NI record online. You’ll need your Government Gateway User ID and Password to access this. If there are any gaps, you can choose to pay voluntary (or Class 3) NICs to top up your record.
Watch Helen Miller, Associate Director at The Institute for Fiscal Studies, in the video below to see exactly how NICs work.
Will I need to be VAT registered?
Probably not when you’re first starting out as the threshold beyond which you must legally register is £85,000. But you can voluntarily register if you:
Think you might earn more than £85,000 in a 30-day period
Do business with companies who do charge VAT.
Sell items that are exempt from VAT such as antiques, printing services or books, for example.
Let's recap!
Explore the freelance self-assessment tax system.
Check your employment status.
Register for self-assessment tax.
Understand your National Insurance contributions.
Decide whether to register for VAT.
You’re now ready to start, but how do you secure work for the first day? We’ll explore a few methods in the next chapter.
