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Freelance on the side: What tax do I pay?

• October 27, 2020

COVID-19 has many reassessing their career path and there a few options that are worth considering when making a decision on the next stage of your career. One of these options is a freelance career – while balancing a full-time job.

Freelance workers are self-employed and hired to work for different companies on particular assignments. Contrary to belief, it is possible to be employed and self-employed at the same time, but a question that often arises – what implications does working on the side have for your freelance tax liability?

How much Income Tax will I pay as sole trader freelancer?

Your income tax is always calculated on total earnings, so you have to pay tax on amounts above the Personal Allowance for your combined income from employment and sole trader profits.

You’ll pay income tax of 20% on all earnings above your personal allowance and below the upper limit of the basic rate, which is £37,500 for the 2020/21 tax year. You’ll pay income tax of 40% on all earnings above the basic rate limit until you reach the higher rate limit (which in the 2020/21 tax year is £100,000).

What about National Insurance?

The National Insurance you pay on your income from your employer won’t change, but it’ll be a bit different for your income from self-employed profits.

To begin with, if your self-employed profits exceed £6,475, you have to pay a flat rate of £3.05 per week. This is called Class 2 National Insurance and is paid directly to HMRC through a direct debit. If you find your profits to be between £9,500 - £50,000 you will be also be charged an additional 9% - this is known as Class 4 National Insurance.

Sole trader or limited company?

As a self-employed person, you can choose to operate as a sole trader or form your own limited company.

The basic difference is that if you’re a sole trader then there’s no legal separation between you and your business. You’re personally liable for all activities of the business, including debts.

If you form a limited company, you create a separate legal entity and you have no personal liability. 

What about expenses?

One of the main benefits of registering as self-employed as a sole trader is that you get to offset your business expenses against your income. You’re only taxed on your self-employed profits.

There’s a similar situation for limited companies – where Corporation Tax is only paid on company profits after allowable expenses. These can include salary and pension contributions as well as certain travel and subsistence expenses.

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By Anirudh Nair