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Tax Deductions Every Freelancer Should Know

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Sumit Agarwal Sumit Agarwal 21 Jan 2025 Self assessment

Tax Deductions Every Freelancer Should Know in 2025

If you’re considering a career change but aren’t quite ready to leave your full-time job, you’ve come to the right place. This article guides you to valuable insights on how to launch a successful freelance career while maintaining your regular employment.

As of January 2025, the number of freelancers in the UK is growing, with several individuals choosing to balance full-time employment with freelance work. This trend allows many to explore their passions, diversify their income, and gain valuable experience without sacrificing financial stability.

Therefore, understanding tax on freelancers, and deductions is necessary for anyone considering this dual career path. Utilising a freelance tax calculator UK can help you estimate your tax responsibilities and plan accordingly. By knowing which expenses you can claim, you can maximise your earnings while minimising tax liabilities.

How Much Income Tax Will I Pay as a Sole Trader Freelancer?

As an employee, the PAYE system usually calculates and deducts your taxes automatically. Any money you make from freelancing, however, is not taxed until you declare it. Here is a breakdown of tax responsibilities:

  • Employer Responsibilities: Tax deductions associated with your pay, such as Class 1 National Insurance contributions, will be managed by your employer.

  • Your Responsibilities: As a self-employed person, you are required to keep account of your entire revenue and compute profits after subtracting permissible expenses. These gains will be subject to taxes and Class 4 National Insurance contributions.

To determine your tax liability, register for self assessment and submit an annual tax return declaring your income. This system allows you to claim allowable expenses, helping reduce your overall tax burden.

Navigating taxes can be complex if you're both employed and freelancing, but by accurately recording your self-employment income and attached to self assessment guidelines, you can manage both roles successfully.

Working Out Income Tax: An Example for 2024/25

To illustrate how to calculate your total income tax as a freelancer in the 2024/25 tax year, let’s consider a detailed example using hypothetical earnings.

Imagine you earn £45,000 as a salaried employee and an additional £20,000 from your freelance work. Here’s how to compute your total income tax liability:

Description Amount (£)

Income from Employment

£45,000

Profits from Sole Trader (Freelance Income)

£20,000

Total Income

£65,000

Personal Allowance

(£12,570)

Total Taxable Income

£52,430

Income Tax Paid at Basic Rate (20%)

£7,540

Income Tax Paid at Higher Rate (40%)

£1,892

Total Income Tax Paid

£9,432

Explanation of the Example:
  • Your total income combines your salary from employment (£45,000) and your freelance earnings (£20,000), resulting in a total of £65,000.

Personal Allowance:
  • For the 2024/25 tax year, the personal allowance is set at £12,570, which is the amount you can earn without paying income tax.

Total Taxable Income:
  • After subtracting the personal allowance from your total income, your taxable income is calculated as £52,430 (£65,000 - £12,570).

Income Tax Calculation:
  • The basic rate of income tax (20%) applies to income between £12,571 and £50,270. The higher rate of income tax (40%) applies to income over £50,270

  • The higher rate of income tax (40%) applies to income over £50,270

Total Income Tax Paid:
  • Adding both amounts gives you a total income tax liability of: Total Income Tax: £7,540 (Basic Rate) + £1892 (Higher Rate) = = £9,432

This example demonstrates how your combined income from both employment and freelancing affects your overall tax liability. Understanding these calculations is important for effective financial planning as a freelancer.

Freelancer vs. Self-Employed

While the terms self employed and freelance are often used interchangeably, they do have distinct meanings that can impact your tax responsibilities.

A freelancer typically works on a project basis for multiple clients, often in creative fields like writing, design, or programming. Freelancers usually have more flexibility in choosing their projects and clients, but they may lack the stability of regular income.

A self employed and freelance can be involved in a broader range of business activities, including freelancers, sole traders, and business owners. Self-employed individuals may operate under a registered business name and can have employees or contractors working for them.

Both freelancers and self employed and freelance are responsible for paying income tax on their profits and National Insurance contributions. However, freelancers often have more varied income streams and may need to track multiple sources of income.

How Much Tax Do Freelancers Pay UK 2024/25?

Freelance tax UK for the 2024/25 tax year is subject to both income tax and National Insurance Contributions (NICs). Here's a detailed breakdown of the applicable taxes:

Income Tax:
  • The personal allowance is £12,570, meaning you pay no tax on income up to this amount.

  • Basic Rate (20%): Applies to income from £12,571 to £50,270.

  • Higher Rate (40%): This applies to income from £50,271 to £125,140.

  • Additional Rate (45%): This applies to income over £125,140.

National Insurance Contributions (NICs):
  • Freelancers must pay Class 4 NICs if profits exceed £12,570.

  • Class 4 NICs: 6% on profits between £12,570 and £50,270.

Therefore, these rates and thresholds are necessary for freelancers to manage their finances effectively and ensure compliance with tax responsibilities. By knowing how much tax you may owe, you can plan your finances better and maximise your earnings.

How to Register as Self-Employed in the UK

Registering as self-employed in the UK is an easy process that ensures you meet your tax responsibilities. Here’s a step-by-step guide:

  1. Visit the HMRC Website: Start by going to the HMRC registration page for self assessment.

  2. Create a Government Gateway Account: If you don’t have one, create an account to access HMRC's online services.

  3. Complete the Registration Form: Log in and fill out the form with necessary details, including:

    • The date you started trading

    • Your National Insurance number

    • The type of self-employed work you do

  4. Submit Your Application: After completing the form, submit it online. HMRC will process your registration and send you a confirmation.

  5. Receive Your Unique Taxpayer Reference (UTR): Within a few days, you’ll receive a letter containing your UTR, which you’ll need for future tax returns.

Obtaining a UTR is important as it identifies you within the tax system and is required for filing your self assessment tax returns. Registering accurately ensures compliance and helps avoid penalties.

Allowable Expenses for Freelancers

Tax on freelancers, understanding allowable expenses is important for reducing your taxable income. Here’s a list of common expenses you can claim:

  1. Business Expenses: This includes office supplies, technology costs (like computers and software), professional fees (such as legal or accounting services), and advertising costs to promote your services.

  2. Home Office Costs: If you work from home, you can claim a portion of your household bills, including utilities and internet costs, based on the space used for your business.

  3. Travel and Transportation: You can deduct vehicle expenses (like fuel and maintenance), public transport fares, and accommodation costs incurred during business trips.

  4. Professional Development: Costs for training courses, workshops, and educational materials that increase your skills are also deductible.

  5. Depreciation of Assets: For high-value items like equipment or furniture, you can claim capital allowances to account for their depreciation over time.

Freelancers Tax UK: What You Need to Know for 2024/2025

As we approach the 2024/25 tax year, several key changes in tax regulations will impact freelance tax UK. One important update is the continuation of the Personal Allowance at £12,570, which remains frosen until at least 2028. This means that as your income rises, you may find yourself paying more tax without an increase in your tax-free allowance.

Another important aspect is the Making Tax Digital (MTD) initiative, which requires freelancers to maintain digital records and submit quarterly updates to HMRC.

Additionally, both employed and self-employed people will be impacted by changes to National Insurance contributions. The reduction of Class 4 NICs to 6% for self-employed profits will alleviate certain financial burdens. Understanding these modifications is necessary for efficient financial planning and adherence as an independent contractor in the upcoming financial year.

VAT Considerations

As a freelancer, understanding Value Added Tax (VAT) is necessary for managing your finances effectively. In the UK, you must register for VAT if your taxable turnover exceeds the threshold of £85,000 in 12 months. If your income is below this threshold, registration is optional but may still be beneficial if you plan to reclaim VAT on your business expenses.

Once registered, you can choose from several VAT schemes to simplify your tax reporting. The most common options include:

  1. Standard VAT Scheme: You charge VAT on your sales and reclaim VAT on your purchases, submitting quarterly or annual returns.

  2. Flat Rate Scheme: You pay a fixed percentage of your turnover as VAT, which can help in bookkeeping but may not allow you to reclaim input VAT.

  3. Annual Accounting Scheme: This allows you to submit one VAT return per year, making it easier for freelancers with stable incomes.

Simplified Expenses Option

HMRC's simplified expenses system offers freelancers an efficient way to calculate allowable business expenses, particularly for those working from home or using vehicles.

For freelancers working from home, if you log at least 25 hours a month, you can claim a flat rate based on your usage. For example, if you work between 25-50 hours, you can claim £10 per month. This method removes the need to calculate the exact proportion of household bills used for business purposes, making it quicker and easier to manage finances.

Additionally, when considering tax on freelancers, it’s beneficial to utilise a freelance tax calculator UK to estimate your potential tax liabilities and deductions accurately.

Similarly, for vehicle expenses, HMRC provides flat mileage rates that freelancers can use without needing to document every fuel receipt. The primary benefits of using simplified expenses include reduced administrative burdens and time savings, allowing you to focus more on your work rather than bookkeeping.

Capital Gains Tax for Freelancers UK 2024/25

As a freelance tax UK, understanding Capital Gains Tax (CGT) is essential when selling or disposing of assets used in your work or personal investments. For the 2024/25 tax year, CGT applies when your profits from asset sales exceed the tax-free allowance, which has been set at £3,000 for individuals.

The current CGT rates are 18% for basic-rate taxpayers and 24% for higher- and additional-rate taxpayers. It's important to note that if your total income, including capital gains, pushes you into a higher tax band, you will incur a higher rate on the gains exceeding the basic rate threshold.

Deadline for Freelancers’ Self Assessment Tax Return

As a freelancer in the UK, it’s important to be aware of the deadlines for filing your self assessment tax return and making payments. For the tax year ending on April 5, the key dates are as follows:

  • Register for Self-Assessment: You must register by October 5 of the tax year.

  • File Your Tax Return: The deadline for submitting your online self assessment tax return is January 31 following the end of the tax year.

  • Pay Your Tax Bill: Any tax owed must also be paid by January 31.

Failing to meet these deadlines can result in penalties. If you submit your return late, you may face an initial fine of £100, with additional charges accruing for continued delays. Moreover, late payments incur interest and further penalties, which can significantly increase your financial burden.

Yes, if you earn more than £1,000 from self-employment in a tax year, you must register with HMRC for self assessment.

You can claim allowable expenses such as office supplies, travel costs, and professional fees to reduce your taxable income.

If you hold no accountancy qualifications and have no background in accountancy, but do have experience in finance (i.e. banking, taxation, insurance) or law instead, due to our unique outsourcing model we can support you.

Freelancers pay taxes through the self assessment system. You’ll need to submit an annual tax return detailing your income and expenses.

Missing the deadline can result in penalties and interest on unpaid taxes.

Get dns accountants Help with Your Taxes

Moving towards the complexities of tax responsibilities as a freelancer can be challenging. We are specialised accountants and can provide invaluable support customised to freelancers.

We offer a range of services, including tax planning, preparation of self assessment tax returns , and guidance on allowable expenses. We can help you understand your National Insurance contributions and ensure you’re compliant with HMRC regulations.

For professional help suited to your needs, call us at 033 0088 3616, email contact@dnsaccountants.co.uk or book a free consultation for expert assistance customised to your needs.

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About the author

Sumit Agarwal
Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants