Freelancing offers flexibility but requires understanding your tax obligations. Here’s your complete guide.
Tax Overview
What Freelancers Pay
| Tax | Who Pays |
|---|---|
| Income Tax | On profits over £12,570 |
| Class 2 NI | If profits over £6,725 |
| Class 4 NI | On profits over £12,570 |
| VAT | If turnover exceeds £90,000 |
Tax Calculation Example
| Freelancer with £40,000 Profit | Amount |
|---|---|
| Profit | £40,000 |
| Personal Allowance | -£12,570 |
| Taxable income | £27,430 |
| Income Tax (20%) | £5,486 |
| Class 2 NI | £179 |
| Class 4 NI (6% on £12,570-£40k) | £1,646 |
| Total Tax/NI | £7,311 |
Income Tax Rates 2025/26
Tax Bands
| Band | Income | Rate |
|---|---|---|
| Personal Allowance | £0-12,570 | 0% |
| Basic Rate | £12,571-50,270 | 20% |
| Higher Rate | £50,271-125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
Personal Allowance Taper
| Income Over £100k | Allowance Reduced |
|---|---|
| For every £2 over | £1 less allowance |
| At £125,140 | No Personal Allowance |
National Insurance
Class 2 NI
| Detail | Amount |
|---|---|
| Weekly rate | £3.45 |
| Annual cost | £179.40 |
| Threshold | Profits over £6,725 |
| Now voluntary | Below threshold |
Class 4 NI
| Profit Band | Rate |
|---|---|
| £12,570-50,270 | 6% |
| Over £50,270 | 2% |
NI Example
| Profit £50,000 | Calculation |
|---|---|
| Class 2 NI | £179 |
| Class 4 (6% on £37,700) | £2,262 |
| Total NI | £2,441 |
Getting Started
Registration Timeline
| Action | Deadline |
|---|---|
| Register as self-employed | By October 5th in second tax year |
| Best practice | Register immediately |
| Penalties | For late registration |
How to Register
| Step | Action |
|---|---|
| 1 | Register for Self Assessment |
| 2 | Receive UTR (Unique Taxpayer Reference) |
| 3 | Set up Government Gateway |
| 4 | Keep records from day one |
Allowable Expenses
Home Office
| Expense | How to Claim |
|---|---|
| Proportion of rent/mortgage interest | Based on workspace |
| Proportion of utilities | Gas, electric, water |
| Proportion of council tax | Same method |
| Simplified method | £6/week (£312/year) |
Working from Home Calculation
| Method | Example |
|---|---|
| Rooms method | 1 of 5 rooms = 20% |
| Area method | 10 of 50 sqm = 20% |
| Hours method | For shared spaces |
Equipment and Technology
| Expense | Deductible |
|---|---|
| Computer | Full cost or capital allowances |
| Software | Full cost |
| Phone | Business portion |
| Internet | Business portion |
| Office furniture | Full cost |
Travel
| Allowable | Not Allowable |
|---|---|
| Travel to clients | Home to regular workplace |
| Travel between sites | Commuting |
| Hotels for business | Personal travel |
| Meals (overnight only) | Regular meals |
Mileage Rates
| First 10,000 Miles | After 10,000 |
|---|---|
| 45p per mile | 25p per mile |
| Or actual costs | If higher |
Professional Costs
| Expense | Example |
|---|---|
| Professional memberships | Industry bodies |
| Training | Relevant to work |
| Books/publications | Work-related |
| Insurance | Professional indemnity |
| Accountant fees | Full cost |
Marketing
| Expense | Deductible |
|---|---|
| Website costs | Full cost |
| Business cards | Full cost |
| Advertising | Full cost |
| Portfolio | Work-related |
What You Can’t Claim
Non-Deductible
| Expense | Why Not |
|---|---|
| Own salary | Drawings, not expense |
| Personal clothes | Even if “work” clothes |
| Parking/speeding fines | Penalties |
| Entertainment | Except very limited |
| Food (unless overnight) | Personal expense |
Record Keeping
What to Keep
| Record | How Long |
|---|---|
| Invoices issued | 5 years minimum |
| Receipts for expenses | 5 years minimum |
| Bank statements | 5 years minimum |
| Contracts | Duration + 6 years |
Systems
| Method | Pros |
|---|---|
| Accounting software | Automated, reports |
| Spreadsheet | Simple, cheap |
| Paper + box | Minimum standard |
Recommended Software
| Software | Cost | Best For |
|---|---|---|
| FreeAgent | £19-38/month | Full features |
| QuickBooks | £15-30/month | Growing businesses |
| Xero | £15-47/month | Popular choice |
| Wave | Free | Basic needs |
Self Assessment
Key Dates
| Date | Deadline |
|---|---|
| April 5th | Tax year ends |
| October 5th | Register for new self-employment |
| October 31st | Paper tax return |
| January 31st | Online return + payment |
| July 31st | Second payment on account |
Payments on Account
| What | Amount |
|---|---|
| First payment (31 Jan) | 50% of previous year |
| Second payment (31 July) | 50% of previous year |
| Balancing payment | Any remaining |
Example Payment Schedule
| Date | Payment |
|---|---|
| Jan 31st 2026 | Balance for 2024/25 + 50% for 2025/26 |
| July 31st 2026 | 50% for 2025/26 |
| Jan 31st 2027 | Balance + new payments on account |
VAT
Registration Threshold
| Threshold | Action |
|---|---|
| Turnover over £90,000 | Must register |
| Turnover under £90,000 | Optional |
| Deregistration threshold | £88,000 |
Flat Rate Scheme
| Benefit | How It Works |
|---|---|
| Simpler accounting | Fixed % of turnover |
| May keep difference | Between collected and paid |
| Limited cost traders | 16.5% |
Standard VAT
| Rate | Applies To |
|---|---|
| 20% | Most goods/services |
| 5% | Some (energy) |
| 0% | Some (books, food) |
| Exempt | Some services |
Pension Contributions
Why Important
| Factor | Details |
|---|---|
| No employer pension | Must arrange own |
| Tax relief | At marginal rate |
| State Pension | NI contributions count |
Options
| Option | Details |
|---|---|
| Personal pension | SIPP |
| Stakeholder pension | Lower charges |
| Annual allowance | Up to £60,000 |
Tax Relief
| Example | Benefit |
|---|---|
| £8,000 contribution | £10,000 in pension |
| Higher rate taxpayer | Claim additional 20% |
| Effective cost | £6,000 |
IR35 and Contractors
What Is IR35?
| Concept | Meaning |
|---|---|
| Off-payroll rules | Are you really employed? |
| Inside IR35 | Pay tax like employee |
| Outside IR35 | Normal self-employment |
Determining Status
| Factor | Inside | Outside |
|---|---|---|
| Control | Client controls how | You decide how |
| Substitution | Must do personally | Can send someone else |
| Mutuality | Ongoing obligation | Project by project |
If Inside IR35
| Consequence | Impact |
|---|---|
| Client deducts tax | At source |
| Limited company | No tax advantage |
| Equivalent to employee | For tax purposes |
Tax-Saving Strategies
Legitimate Approaches
| Strategy | Benefit |
|---|---|
| Claim all valid expenses | Reduce taxable profit |
| Pension contributions | Tax relief + future income |
| Marriage Allowance | If spouse low earner |
| ISA savings | Tax-free growth |
Timing Income
| Strategy | When |
|---|---|
| Defer invoicing | If income spike |
| Accelerate expenses | Before year end |
| Split income years | Smooth tax bills |
Getting Help
When to Use Accountant
| Situation | Benefit |
|---|---|
| Turnover over £30-50k | Worth the cost |
| Complex arrangements | IR35, multiple sources |
| VAT registered | Quarterly returns |
| First year | Set up properly |
Accountant Costs
| Service | Typical Cost |
|---|---|
| Annual accounts | £200-500 |
| Tax return | £150-300 |
| Bookkeeping | £50-150/month |
| Full service | £100-300/month |
Summary
| Key Deadline | Date |
|---|---|
| Tax year end | April 5th |
| Register | October 5th |
| Paper return | October 31st |
| Online + pay | January 31st |
| Payment on account | July 31st |
| Key Rate | Amount |
|---|---|
| Basic Income Tax | 20% |
| Higher Income Tax | 40% |
| Class 2 NI | £3.45/week |
| Class 4 NI | 6% / 2% |
| VAT threshold | £90,000 |