Self employed tax obligations guide

Chris Andreou

May 11, 2021

self employed tax guide

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Tax

Introduction

When you're self-employed, you have unique financial obligations—especially when it comes to paying your taxes. 

When you work for a larger corporation, or even a relatively small business, your company takes on a large percentage of handling your tax responsibilities for you.

As a freelancer or small business owner, you're on your own. You work as an independent contractor for each of the clients you work for—and they don't take taxes out of your check before they send it to you. 

How then should you handle the responsibility of paying your taxes?

This guide will help you get started:

Your Tax Obligations When You're Self-Employed

When you're self-employed, you have the same tax obligations as other employees across the UK (and a self-employment tax to consider on top of that).

Each year, your actual tax obligations will change based on current tax laws. However, most freelancers can successfully estimate the amount they will owe the government.

Your personal allowance.

Your personal allowance is the first amount you make each year-an amount that you earn tax-free.

The personal allowance can change from one year to the next. The personal allowance can change from one year to the next; it was £12,500 for 2019/20 and 2020/21, and has been increased to £12,570 for the 2021/22 tax year. The personal allowance will be frozen until 2026.

Your basic tax threshold.

At the basic tax threshold, you are taxed at 20% of your income.

This amount applies at the basic level, which also changes based on the personal allowance and other factors influencing tax rates.

The basic tax threshold for 2021/22 is £12,571 – £50,270. For 2019/20 and 2020/21, the basic tax threshold resides between £12,501- £50,000.

Higher tax rates.

Above the basic tax threshold, you can expect to pay a higher percentage of your income for taxes.

Up to £150,000, you will pay 40% of your income in taxes.

Higher still.

Once your freelance or self-employment income crosses the £150,001 threshold, you can expect to pay 45% of your income in taxes.

Preparing for this obligation is an important part of preparing your budget as a freelancer. You need a plan to pay your taxes on time to avoid facing penalties and fees.

Without this plan, you may no longer be able to operate as a freelancer—and you may find yourself paying the government back for those expenses for a long time to come.

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How to Handle Your Tax Obligations

When you were employed by a larger business, your employer probably took care of your tax obligations without you ever needing to think much about it.

The amount came out of each pay cheque automatically, making it easy for you to keep up with those important payments.

As a freelancer, you have to keep track of it on your own—and it's extremely important that you pay attention to those obligations.

Self employed individual with their tax receipts

Step One: Register for Self-Assessment

Since you're now responsible for handling your own tax obligations, you will need to register for Self Assessment.

If you decide to become a freelancer mid-year, you'll need to take care of that as soon as possible. There are penalties and fees for waiting, so make sure you take care of those responsibilities early. As a long-term freelancer, you need to register for self-assessment each year by 31 January.

To register, simply visit the Gov.uk registration page. You will be able to take care of all of your obligations online, which helps keep the process as simple as possible-and ensures that you don't miss any important deadlines.

Once you're registered, you will be sent a letter with your 10-digit Unique Taxpayer Reference (UTR).

You'll also get a unique activation code to set up your online account, which will allow you to keep your information private. You should expect this information to arrive within 10 days of registration. If you lose this number or if it isn't sent on time, you can request for a new one.

Step Two: Submit Your Tax Information

In order to file your tax return, you'll need to submit your tax return online.

The deadline is in October each year, for the tax year that ended in April. You'll need to issue information about all the income you made freelancing from all sources, as well as any deductions that could help you minimize your tax burden. 

The website will walk you clearly through the entire process of filling out your information. However, if you have any questions, working with an accountant can help you avoid any mistakes on your taxes. 

And be sure to keep a record of all of your income and all of your expenses throughout the year. The more those expenses add up, the more deductions you may have—but it's equally important that your information be entirely accurate when you file your taxes.

Step Three: Pay Your Taxes

Each year, you can expect your taxes to be due by October of the previous year. If you are unable to meet those financial obligations, the government will work with you.

However, there are fines and penalties associated with failure to pay on time, which means you should do your best to come up with the full amount of the payment on time wherever possible. 

In some cases, you may also be expected to pay 50% of last year's tax bill toward the next year. Many freelancers struggle with this expense, so it's important to budget for it as soon as possible. Carefully consider the coming tax burden throughout the year, so that you can set money aside to cover those expenses.

What Deductions Can Help Minimize Your Tax Burden?

As a freelancer, it can be difficult to remember to budget for your taxes—and of course, you want to minimize your tax burden as much as possible.

Make sure you carefully consider qualified business expenses when you fill out your taxes.

These may include:

  • The cost of an office where you work, if you work out of an office for your company. This can include the cost of rent for a small freelancing space as well as a larger office for self-employed individuals.
  • Reasonable costs associated with your home, if you do freelance work from home. This can include heating costs as well as rent costs.
  • You should divide your home expenses reasonably with business expenses when claiming them on your taxes; for example, you may want to divide it according to the number of rooms used for business purposes, or according to the amount of your time spent working from home.
  • Travel expenses: Consider what percentage of the usage for your vehicle is a business expense as well as any expenses accrued while actively traveling for work: airfare, rental cars, hotel rooms, etc.
  • Property and equipment for your office: You may need everything from office stationery to a printer, scanner, and other equipment. As a photographer, you may need to invest in a great laptop, editing software, or a camera. Those expenses can all be deducted as business expenses as long as the item is used primarily for business purposes.
  • Legal and financial costs: Do you need to outsource some of your tasks, including legal or financial tasks? If so, they can be included as a business deduction on your taxes.
  • Clothing costs: In some cases, you can include clothing costs as one of your business deductions. Make sure, however, that any clothing included is purchased specifically for work purposes.

You need to carefully review and consider your deductions each year.

Those deductions can make a huge difference in your tax burden, depending on your business expenses—so make sure you know what is expected of you.

What if You're Employed and Self-Employed at the Same Time?

In some cases, you might not be freelancing full-time.

You might still be employed by that larger company or corporation while you work to build your freelance base or you might just use freelancing to earn a little extra money on the side. Fortunately, there are policies and procedures in place to account for that too.

As soon as you start bringing in self-employment or freelancing income, you need to register for Self Assessment just as you would if you were bringing in your sole income from freelancing. 

Your taxes will then be based on your total income. That is, if your freelancing income pushes you into a higher tax bracket, you will need to pay the higher-level taxes on that income.

At the same time, however, registering as a freelancer means that you can deduct allowable business expenses from your tax returns—which can, for some people, significantly decrease their tax burden.

Consider consulting with an accountant to better understand your legal responsibilities as they relate to your freelance income, and how to handle your taxes.

Self Employed Registration Guide

What's Inside:

  • What is a Sole Trader?
  • Sole trader advantages
  • Sole trader disadvantages
  • How to register self employed
  • Sole trader responsibilities
  • Self employed tax
  • Important self employed deadlines
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Self Employed Registration Guide

What's Inside:

  • What is a Sole Trader?
  • Sole trader advantages
  • Sole trader disadvantages
  • How to register self employed
  • Sole trader responsibilities
  • Self employed tax
  • Important self employed deadlines

Get Free Advice from an Accountant

Book a free 30 minute call with an accountant. We'll help walk through setting up your business, switching accountant or any of your tax queries. All our accounting packages come with a free 30 day trial.

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Self Employed Registration Guide