Self-employed setup and freelancer taxation in the UK

Self-employed setup and freelancer taxation in the UK

Self-employed setup and freelancer taxation in the UK

Starting a business as a sole trader in the UK is a simple process if you want to run your own business as an individual. As a sole trader, you are self-employed and responsible for paying taxes on your business's profits and any losses your business makes. You have the freedom to decide what work you do, how you do it, and when you do it, but you won't receive traditional employee benefits like sick pay or holiday pay. To set up as a sole trader, you must inform HM Revenue and Customs (HMRC) through Self Assessment, and register for Self Assessment by the 5th of October in the second year after starting your business (at the latest). To register, you can do it online for free or print the form and send it by post. As a sole trader, you may also have to pay National Insurance if you make a profit of £6,365 or more a year.

To become a sole trader in the UK, you need to follow these steps:

  1. Check if you meet the criteria: You need to have earned more than £1,000 from self-employment in the previous tax year.
  2. Register for Self Assessment: This is how you inform HM Revenue and Customs that you're self-employed and pay tax through Self Assessment. You can register online or by mail.
  3. Register for National Insurance: As a sole trader, you may have to pay National Insurance contributions to qualify for state benefits. The type of National Insurance you pay depends on your earnings. Click here to learn about voluntary Class 2 National Insurance payments to help you qualify for benefits.
  4. Once your business is established, you must register for VAT if your annual revenue exceeds £85,000. Also, it is required to register for VAT if you want to invoice customers outside the UK. If it's advantageous for your firm, you can also voluntarily register for VAT.

Alternatively, you can use Abillio - invoicing and tax compliance service for cross-border freelancing. In Abillio's case, you don't need to establish a legal entity or apply for VAT, with Abillio's company-as-a-service solution you can start your freelancing business right away. Register your free account here >>

How much can you earn tax-free if you’re self-employed?

If you’re self-employed, you’re entitled to the same tax-free Personal Allowance as someone who’s employed. For the 2022-23 tax year, the standard Personal Allowance is £12,570. Your personal allowance is how much you can earn before you start paying Income Tax. If you earn over £100,000, the standard Personal Allowance of £12,570 is reduced by £1 for every £2 of income you earn over the £100,000 limit for the 2022-23 tax year. However, if you have two jobs and one is self-employed, things are a little more complicated.

If your freelance income is below personal allowance, you can use Abillio company-as-a-service for legal entity and cross-border VAT invoicing. Register your free account here >>

Registering for freelance tax in the UK

As someone running their own business, you are legally obliged to tell HMRC about it if you earned more than £1,000. You can do so online . The deadline to register is 5 October of the business’s second tax year. For example, if you started your business in June 2021, you would need to register with HMRC by 5 October 2022. You may be fined for not doing so in time.

When you register, HMRC will send you a letter with your 10-digit Unique Taxpayer Reference (UTR) and then set up your account for the self-assessment online service. You will also receive a letter within 10 working days (21 days if you are abroad) that contains an activation code. Using this code and the UTR number, you can finish the registration process online, via the HMRC website . You will also be asked for information about your business, such as the trading name and contact details.

With Abillio's company-as-a-service solution, you can start your freelancing business without formalities right away. Register your free account here >>

How to pay freelance tax in the UK

As a freelancer or self-employed professional, you pay income tax after deducting allowable business expenses. You’ll need to file a self-assessment tax return online by 31 October of the following year. HMRC will then send you a bill. If you filed your return online, this is displayed up to 72 hours after you have sent in your returns. If you made a postal declaration, you will receive a bill by post. 31 January is the deadline to pay the tax you owe.

In some cases, you may have a second payment deadline if you make advance payments, known as payments on account . Such payments are due twice each year, usually by midnight on 31 January and 31 July.

You can pay in several different ways:

Missing any of these deadlines incurs both a penalty and an interest payment. If the deadline falls on a weekend or bank holiday, make sure your payment reaches HMRC on the last working day before the deadline.

National Insurance Contributions if you’re self-employed

National Insurance contributions pay for certain benefits, including the State Pension and Universal Credit.

Certain benefits are also based on the contributions you’ve made.

Do self-employed workers pay National Insurance?

Yes. Most self-employed people pay Class 2 NICs if their profits are at least £6,515 during the 2021–22 tax year. Or £6,725 in the 2022-23 tax year.

If you’re over this limit, you’ll pay £3.05 a week, or £158.60 a year for 2021–22 (£3.15 a week or £163.80 a year for 2022-23).

Paying Class 2 contributions is voluntary for self-employed people with profits below the Small Profits Threshold. Paying Class 2 National Insurance contributions, even if your profits are lower, can still help you build contributory entitlements to benefits and the State Pension.

If your profits are £9,880 in 2022–23, you’ll also pay Class 4 National Insurance contributions.

If you’re over this threshold, you’ll pay 9% on profits between £9,880 and £50,270 in 2022–23, and 2% on anything above this.

Note: This information is from official sources and should not be considered as a substitute for legal advice. Always check official websites or consult a lawyer or tax consultant before taking action.