The Freelancer’s Guide to Navigating Taxes and Finances

Unless you’re a professional accountant, you probably won’t be familiar with the ins and outs of the tax and National Insurance rules that apply to freelancers. The good news is that tax isn’t a scary or complicated topic and we’ve put together this handy guide to help you get to grips with the basics.

Understanding Your Tax Obligations

As Income Tax is usually deducted from wages automatically, freelancers and self-employed people must report their income directly to HM Revenue and Customs (HMRC) via a Self Assessment tax return. Every freelancer expecting to earn more than £1,000 per annum should register for Self Assessment. 

Here’s what else you need to know. 

Personal Allowance

Unless your profits exceed £125,140, you will get a personal allowance of £12,570 in the 2024/25 tax year. This means that you won’t pay any tax on the first £12,570 you earn as a freelancer every year.

Tax Rates for Freelancers

The amount of income tax you are required to pay as a freelancer is in line with what you would pay as an employee.

You pay no tax on trading profits between £0 and £12,570 as this is your personal allowance. The basic rate of tax, which is 20%, applies to trading profits between £12,571 and £50,270. The higher rate of tax of 40% is applied to trading profits between £50,271 and £125,140. 

If your trading profits exceed £125,140, you will be required to pay the additional rate tax, which is 45%. You also will not receive a personal allowance. 

Expense Tracking and Allowable Tax Deductions

As you are required to submit your own tax return, it is important to maintain accurate financial records that detail your income, outgoings and expenses. 

Deductible Expenses Before Tax

As a freelancer, you only pay income tax on your profits. This means that you can deduct all allowable expenses from your turnover before determining your profits. So, if you were to turn over £50,000 and you incurred £10,000 of allowable expenses during a tax year, you would only pay tax on your taxable profit of £40,000. 

There are a variety of allowable expenses that you could claim as a freelancer, including:

• Office costs, including phone bills and stationery
• Financial costs, including bank charges and insurance
• Marketing and advertising costs, including website hosting
• Business premises costs, including business rates

If you use something for both business and personal use, you must only claim on the costs incurred as part of your business operations. For example, if your phone bill is £100 and only £50 was spent on business calls, you can only claim £50 of business expenses. 

National Insurance Contributions

It is also important to set aside enough money to pay your National Insurance contributions, which are a requirement to qualify for certain state benefits and the State Pension. The class of National Insurance you will be required to pay as a self-employed freelancer is dependent on how much profit you make. 

Class 2 National Insurance

If your profits are below £6,275 you are not required to pay any National Insurance, however, you are able to voluntarily pay Class 2 contributions if you want to prevent gaps from appearing on your National Insurance record. Contribution rates for the 2024/25 tax year are £3.45 per week. 

Minimising gaps on your record is important in order to ensure that you aren’t prevented from qualifying for the State Pension and certain benefits, including bereavement support payments and maternity allowance in the future. 

If your profits are above £6,725 per year, the government has measures in place to cover your Class 2 National Insurance contributions. This was announced by Jeremy Hunt in the Autumn Statement in 2023 and essentially means that although you do not need to pay anything, your National Insurance record is protected as a freelancer. 

Class 4 National Insurance

If your profits are above £12,570 per year, you will be required to pay Class 4 National Insurance contributions. For the 2024/25 tax year, Class 4 contributions are charged at 6% on profits up to £50,270 and 2% on profits over £50,270. 

When you understand your tax obligations as a freelancer, it becomes much easier to manage your finances and ensure you’re investing in the future success of your business. This extra investment can be made in many different ways, such as creative workspaces, learning materials and promotion.