All self-employed people are taxed via the Self Assessment system each year. As a freelancer you pay income tax and National Insurance Contributions on your business profits after deductions for expenses.

Income Tax | This is the tax you pay on your income you earned from freelancing. 

The standard Personal Allowance is £12,570, which is the amount of income you do not have to pay tax on. Your Personal Allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance. It’s smaller if your income is over £100,000. For income in 2021/2022 above this threshold, you will be taxed at the following levels:

  • The Basic Income Tax rate of 20% on income up to £50,270

  • The Higher Income Tax rate of 40% on income between £50,271 and £150,000

  • The Additional Income Tax rate of 45% on income over £150,000.

As a freelancer, you pay Income Tax through Self Assessment. The HMRC must receive your tax return and any money you owe before 31 January in the year after your tax year. For example: the tax year starts on 6 April 2020 and ends on 5 april 2021. You will need to pay your tax return before 31 January 2022. Make sure to also register for Self Assessment before the 5th of October 2021 to avoid penalties.

National Insurance Contributions | In addition to income tax, you will also need to make National Insurance Contributions (NICs). The amount you have to pay depends on the level of your earnings.

There are currently two types of NICs freelancers have to pay. There are Class 2 NICs – which are £3.05 per week – if your profits are above £6,515 (2021/22 Tax Year) – and Class 4 NICs.

HMRC will work out the amount of Class 4 NICs you are liable for during the annual self assessment process. Your liability is based on the amount of profit your business makes; 9% on your earnings between £9,568 and £50,270, and 2% on any profits above this.

VAT | If your business has a turnover of more than £85,000 (for the year from April 2021) over a 12 month period, you must also register your business for Value Added Tax (VAT). When you are VAT-registered you will need to add your VAT-number to your YoungOnes account so we can add it to your future invoices. You will also be able to reclaim the VAT you have paid on business costs.