From understanding expenses to starting a limited company, our downloadable business guides can help you.
As a freelancer, it’s important to get your head around the tax facts. Some solid knowledge here can spare you and your business from penalties, whilst awareness of the relevant rates can help better inform how you build your business – going Limited, for instance, perhaps ensuring that your business is run a little more tax efficient.
As such, your chosen legal structure will determine what tax you pay, Limited Companies paying different taxes to sole traders, so let’s examine both of these structures and see how they differ.
Freelancing as a sole trader, you’ll be required to pay the following –
Class 2 National Insurance contributions (NICs) at £2.70 per week (unless you earn less than £5,725 per year)
Class 4 NICs on profits over £7,755 at 9% up to £41,450, and then 2% thereafter
You’ll pay Income Tax and Class 4 NI contributions via the information provided in your Self Assessment, whilst there’s a number of ways you can cover your Class 2 NI contributions, paying monthly via Direct Debit amongst the options available.
As a Limited Company freelancer, things are a little different on the tax front, and you’ll be faced with paying the following –
Corporation Tax on your taxable profits (20% up to £300,000, after which the rate you’ll face paying rises)
Income Tax and NICs on your income via PAYE and RTI
VAT, although only if your business is VAT Registered
Tax on dividends (more details here)
While on the face of it this might seem like a lot of tax to pay, freelancing as a Limited Company can often work out better financially. That said, there are added legal responsibilities that come with incorporation, so bear that in mind when you’re considering going limited. Give our calculator a try to work out your take home pay.
You might avoid a fine if a close relative died shortly before the self assessment deadline, you've been seriously ill, or if you had major IT problems.