Tax advice for the self-employed

Are you self-employed? Discover what you need to know about paying tax when you work for yourself.

It is estimated that around 4.1 million in the UK work for themselves. If you are one of them then you will probably be liable to pay freelance tax in the UK and register for self-assessment. 

You may also need to pay several different kinds of taxes such as income tax and value-added tax (VAT). You can find plenty of tools and advice online to help you work out exactly what you owe such as a free UK VAT calculator that will especially come in handy when you are filing your annual tax return. If you find yourself getting overwhelmed with all the different tax laws, then here is a basic guide to help you out.

The freelance tax system

HMRC collects and allocates taxes and disbursements for self-employed workers, but the term freelancing does not exist in the world of taxes. If you are a freelancer then you are classified as a sole trader, a partner in a business or you will be trading through a limited company.

Regardless of what you are classed as, anyone working for themselves must pay income tax, NI contributions and possibly also VAT. Essentially, you will need to fill out a self-assessment return every year and keep HMRC up to date.

Income tax

Anyone earning money from a business or through work in the UK must pay income tax on said earnings. How much you pay depends on how much you earn, and is determined by a set of progressive tax bands.

If you are self-employed or a sole trader, then your taxes depend on how much money you made and the allowable expenses that you have incurred. Find out more about what counts as business-related expenses here.

Tax for partnerships

Partnerships in the UK do not pay tax – each partner pays tax on their share of the business profits via their own self-assessment form. Each partner is entitled to the standard personal allowance of £12,570 and then any other deductions and reliefs that are applicable, before paying income tax and NI contributions.

Tax on limited companies

As a sole trader, you are just an individual whereas a limited company is a legal entity in itself. A limited company must have a separate bank account and all profits belong to the company and not the individual that owns said company.

After paying the corporate income tax, the remaining profits can then be distributed among members or shareholders – the recipients then must claim their distributions via a self-assessment form. As a company director, you will pay yourself a salary which means you will pay personal tax, NI contributions accordingly through the company’s PAYE scheme.

Corporation tax

Sometimes it makes sense to register your business as a private limited company or a limited liability partnership rather than continue as a sole trader, as this may reduce the taxes you need to pay.

Sole traders pay personal income tax at progressive rates up to 45% while limited companies pay corporation tax on any profits at 19%, while dividends to shareholders are tax-free up to £2.000.