Freelancer's Guide to Tax in the UK

A straight-talking guide to tax for UK freelancers

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This guide provides some simple, straight-talking tips on tax, avoiding common mistakes, and how to prepare for the UK's Making Tax Digital initiative.

Before you read this guide, whether you're new to freelancing in the UK, or a seasoned pro, understanding how to manage your tax bill is crucially important so we always recommend you get professional tax and financial advice from a qualified accountant.

In this guide

A straight-talking guide to tax for UK freelancers

3 Practical tax tips for freelance sole traders

Emily Coltman FCA, Chief Accountant to FreeAgent - who provide an online accounting system for freelancers and small businesses - gives her top tips to make tax easier for freelance sole traders:

1) Remember Tax return and payment deadlines

31st January is an important date for your diary. Your income tax and National Insurance contributions must be paid before this date each year, following the end of the previous tax year.

You must also file your self-assessment tax return by the same date each year, if you file your return online.

2) Prepare yourself for payments on account

You will need to make 'payments on account' if your income tax and class 4 National Insurance bill is more than £1,000 a year.

This means on the 31st January and the 31st July each year, you have to pay half of what you think your next tax bill will be, based on the previous year.

For freelancers just starting out, this could mean having to pay a bill for one and half year's tax in your first year. HMRC provide a 'ready reckoner' to help you estimate and budget for your self-employed tax bill.

3) Accurately claim use of home as an expense

Many remote freelancers can provide their service to clients from home. It can be tempting to claim 'simplified expenses' on your home as it saves a great deal of admin, but you might be paying more tax than you need to.

Here is an infographic from FreeAgent showing how to calculate your 'use of home' expense as a sole trader.

Often, especially in the case of more lucrative commissions, the client may have their own contract. If this is the case make sure you read it thoroughly and fully understand what you are signing up to. Many contracts will require you to hold certain types of insurance which you need to be aware of.

Common mistakes to avoid

In addition to the handy tips above, FreeAgent's Emily Coltman also recommends avoiding these common mistakes.

Claiming too much for food and drink

If your freelance business is a limited company, you can only claim the cost of food and drink when you're out on business. If you are a sole trader, the rules are slightly different and you can only claim food and drink expenses when:

Registering for VAT when you might not need to

You only have to register for VAT once your VAT-taxable sales go over the VAT registration threshold, which is set by HMRC each year. The threshold as of 1st April 2016 is £83,000.

Registering for VAT even if you're beneath the VAT threshold can be beneficial if you have to purchase materials or equipment on a regular basis and wish to reclaim the VAT.

However, being registered for VAT means you will need to file a quarterly VAT return and manage the associated admin.

Claiming tax relief on personal journeys

According to HMRC, there are a number of travel expenses you can legitimately claim as business expenses:

However, you can't claim for:

As a freelancer, it's likely any car travel will be done in your own personal vehicle. If so, you need to ensure you only claim for the business portion of your travel.

There are two ways to claim expenses on your personal vehicle, if you use it for business journeys:

For more information, check out HMRC's guide on travel expenses.

What freelancers need to know about Making Tax Digital

Making Tax Digital was an initiative announced in the March 2015 budget, as part of a pledge from the UK government aimed at 'making tax easier'. By 2020, the tax return as we know it won't exist and all businesses will need to submit regular tax summaries digitally.

FreeAgent surveyed over 500 microbusinesses in 2016, and 43% were not aware this change was coming, so here are the key points to be aware of:

Everyone will have to file digitally

Once Making Tax Digital is fully rolled out, HMRC will require businesses to use accounting software or other 'digital record-keeping software' that can link to HMRC's digital accounts. It won’t be providing its own bookkeeping/accounting software, and instead will be relying on software providers like FreeAgent to provide tools.

Info will be required at least quarterly

Businesses will need to send 'summary information' about their income and expenditure four times a year, or more frequently if they prefer. HMRC is hoping that this will be a simple thing to do, since all of the business’s bookkeeping information would already be held digitally.

£10,000 threshold for sole traders and partnerships:

At the moment, HMRC is proposing that Making Tax Digital would only apply to sole traders and partnerships with a turnover or annual income above £10,000. It is likely to also apply to limited companies, but we don’t have the details yet - HMRC has promised a separate consultation for limited companies and their directors later this year.

Optional voluntary payments

HMRC isn't planning to change the current tax payment dates, but is proposing businesses have the right to make 'voluntary payments' towards their tax liabilities throughout the year. This will mean businesses can decide how often and what amount they want to pay, offering them more flexibility.

New penalty system for late filing

HMRC is proposing to get rid of the current penalty system for late submissions of tax payments. Instead, it would change to a 'points' system (similar to driving licence penalty points) and a financial fine would only be imposed when the points reach a certain number.

For more information on Making Tax Digital, you can read the consultations, or join the Making Tax Digital discussion on FreeAgent's website.

Important Reminder

Whether you're new to freelancing in the UK, or a seasoned pro understanding how to manage your tax bill is crucially important so we always recommend you get professional tax and financial advice from a qualified accountant.

Other Resources

Working with higher value projects

As your business begins to expand and you work on higher value projects, you need to work out ways of protecting yourself.

Freelancer's guide to IR35

Understand IR35 and the tax implications of freelancing in the UK.

Getting the most from remote working

Getting the most from remote working means finding your ideal position, and coming up with a unique strategy to enhance your productivity, wellness, and work/life balance.

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