Freelancing On The Side: What Tax Do I Pay?

Have you recently started freelancing on the side of your full time employment and wondering how the tax works? If you are someone running your own business, you are legally obliged to tell HMRC about it if you earned more than £1,000 within a year. You can do this online within a year of trading.

Hm Revenue and Customs collects and allocates taxes for self-employed workers. Ultimately any sole trader needs to pay tax and national insurance. You need to fill out a self-assessment return every year. How much tax you pay will depend on how much you are earning and how much is expensed. There are certain business related expenses you can take from your income before calculating taxable profit.

As a sole trader your profits will be added on to your personal income and assessed at your personal tax rate.

These are the current tax bands 2021 - 22

• Basic rate (20%) tax if you earn between £12,571–50,270
• Higher rate (40%) tax if you earn between  £50,271 - £150,000
• Additional rate (45%) tax if you earn between £150,001+

When you submit your self-assessment return form you will need to make HMRC aware of tax already paid on your earnings from your employer. HMRC will then work out the tax payable on your profits from your sole trading business.

How much National Insurance should I pay?

If your profits earned from freelancing exceed £6,475 in the tax year you will have to pay Class 2 NI. This is a flat rate of £3.05 per week which is paid via direct debit to HMRC.

What are my allowable expenses?

These will be taken out of your earnings before you are taxed, only your profits are taxed. So it's important to keep all receipts and records of these purchases as proof.

1. Office costs
2. Travel costs
3. Clothing expenses
4. Staff costs
5. Advertising or marketing
6. Training courses
7. Purchases to sell on - such as raw materials

Good Luck on your new venture!