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Tax issues when working as a freelancer

When you’re employed, tax is something that gets looked after for you. You may have to deal with the occasional form when you change jobs, but otherwise all you need to understand is roughly how your earnings will be affected at the end of the month.

When you’re a freelancer, you have to do it all yourself. There’s a lot to think about, especially when you’re just starting out, and it’s not something you can afford to put off.

The good news is that, with more control over your tax affairs, it’s often possible to keep more of your money.

The essential nature of good record keeping

From the moment you start trading, it’s vital that you keep track of your income and expenses. Save copies of invoices and payment notices, bank statements and receipts.

These items will need to correspond exactly with your written records. It can be a good idea to scan receipts because they often fade over time. You will have to keep these documents for seven years, even after you’ve paid tax, so file them carefully.

Most people use a folder for each year with insets to divide it into 12 monthly sections. You will need to submit these records if you are ever audited, and you may also need to refer to them yourself if you suspect that you may have made an error or if you find yourself in a dispute with a client.

Good records don’t take a great deal of time to attend to, and they can save you a great deal of trouble.

Successful freelancers learn these skills early. Alison O'Riordan, a freelance journalist who has written for the likes of the Mirror and the Irish Independent, has managed her complicated career using the same strong organisational skills she needs for her work. Like Alison, who is best known for her crime writing, you need to learn to treat record keeping as part of the job.

Sole traders

Most freelancers manage their affairs as either sole traders or employees of their own limited companies. For sole traders, managing tax is comparatively simple. You will need to pay Income Tax on earnings over your personal allowance (£11,000 for most people).

You will also need to make National Insurance contributions on any income over £5,725. If you’re earning less than that, you can opt to pay voluntary instalments, which will contribute to your state pension and entitle you to certain state benefits if you should need them.

Limited companies

If you’re earning well over the tax threshold, it can be advantageous to set up a limited company. In this situation, you will pay your Income Tax and National Insurance contributions through PAYE and RTI.

You will have the option of paying yourself below the tax threshold and declaring any further income as company profit. You can then declare the costs of paying yourself as an expense, and only pay Corporation Tax on what remains.

The company can then give you shareholders’ dividends, which also attract tax, but at a lower rate. You will be obliged to bring in a professional to go through your end-of-year accounts.

Understanding expenses

Whether you are a sole trader or part of a limited company, you can claim expenses against tax. You can’t claim everything, however – it will have to be reasonable, and it will have to relate to your business.

Food and entertainment are two areas where people commonly get into trouble by making illegitimate claims. The HMRC website has useful guidelines on what you can and cannot count as an expense.

Setting aside money

Unlike a paid employee who pays Income Tax month by month, freelancers have to pay everything they owe at once when the tax bill arrives. This can be a nightmare if you haven’t set enough aside, and if you can’t pay it straight away, then there will be fines to pay, and interest to pay on the fines.

The easiest way to avoid running into trouble is to make a rough tax calculation at the end of each month and set money aside then.

Don’t be tempted to wait until you’re over the tax threshold to start saving. Multiply each month’s income by 12 to estimate your annual income, work out what you would have to pay based on that, then set aside a twelfth of that. At the end of the year, you should have roughly what you need.

All of this can seem very complicated, but it’s just a matter of learning the rules and keeping an eye on the income thresholds in case your tax rate goes up. Once you’ve got the hang of it, all you need to do is be diligent and make sure you don’t miss crucial filing dates – then you can concentrate on the work you’ve chosen to do.


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