If you are new to Freelancing, or even if you have been freelancing for a while, then this is a warning for you. Whereas employees are paid after tax, when you are a freelancer or self employed you are paid BEFORE any tax is deducted. Unfortunately there is some misunderstanding around this which means many freelancers get a nasty surprise at tax time.
As a freelancer you are responsible for dealing with your own taxes. You are required to calculate and pay over Income Tax, Class 2 National Insurance and Class 4 National Insurance. If you are a basic rate tax payer then this is 20% income tax, Class 2 NI at a fixed rate and Class 4 as a percentage of your earnings. This is payable by 31 January each year, along with a payment on account by 31 July.
FOR EVERY £100 YOU EARN £30 BELONGS TO THE TAX MAN
£30 may be an overstatement because you will be entitled to some tax reliefs and allowances on expenses, but assuming you need to pay 30% in tax for everything you earn is the safest way to budget for your tax bill on an ongoing basis.
The reality of budgeting for tax bills by freelancers can be very different – income can fluctuate month to month meaning it becomes necessary to dip into tax funds or some simply overspend each month without considering tax implications.
The tax man does not look kindly on people who do not pay their tax bills so freelancers should try and put away an amount each time they get paid into a deposit account. That way the money is tucked away for tax time.
If you find you need to use your tax money each month it is advisable to take a step back and assess your situation because it is a problem that won’t go away, in fact it will escalate as interest and charges are applied.