UK: Tax Obligations for Freelancers and the Self-Employed

May 14, 2021

Freelancers and self-employed who are registered as sole traders must declare their income and pay taxes on it each year, and contrary to employees, they must take care of the whole admin process themselves. 

In this article, we’ll guide you through: 

  • the registration process with HMRC
  • the tax brackets and tax-free income
  • paying your income tax as a sole trader.

Let’s dive in. 

Registering with HMRC as self-employed

In case you haven’t filed a self-assessment tax return last year, you need to register as self-employed on the website of HMRC. We advise you to register for Class 2 national insurance and self assessment quickly. If you miss the October 5 deadline in the second year after the beginning of your business activity, a penalty might apply. 

To register, you need to complete the CWF1 form online. After that, HMRC will send you a letter containing your UTR number (UTR is short for Unique Taxpayer Reference), and another letter with your account activation code. 

Once you’re done with this, you can fill your return, pay your taxes, and pay your insurance. 

Personal allowance and tax-free income

As a sole trader, you have the right to the so-called personal allowance. This is the yearly amount of money that is tax-free, i.e. on which you don’t need to pay any income taxes. For 2020-2021, it’s £12,500, while for 2021-2022 it’s £12,570. It’s susceptible to increase (to compensate for inflation), so for up-to-date info on this, check HMRC’s website. For now, however, and until 2026 it might remain frozen, which was detailed in the Spring Budget for 2021.

Income tax rates and tax rate brackets

Once you go over the personal allowance threshold, you need to pay taxes on the income above that amount. How much tax you owe will be dependent on your total income for the year. Each tax bracket rate applies to the amount of money within that bracket, and not to the total amount. Here are the different tax brackets and tax rates for 2021:

  • Tax-free personal allowance - income up to £12,570: 0%
  • Basic rate - income from £12,571 to £50,270: 20%
  • Higher rate - income from £50,271 to £150,000: 40%
  • Additional rate - income above £150,000: 45%.

In addition to that, you should know that if you earn less than £1,000 for the tax year, you don’t need to file a tax return for this money, which is referred to as the trading allowance. You can still decide to do it, in order to be better prepared for the next tax year. 

After you calculate your tax and file your tax return, you’ll receive your tax bill. You can pay it online on the HMRC’s website, or use a Bacs bank transfer.