Our accountancy partner, Mazuma, have written the below accounting advice for freelancers - with tips and guidance on income tax, National Insurance, self-assessment tax returns and more

Accountancy basics

Freelancing can be incredibly liberating, so it’s no surprise that the number of freelancers in the UK is growing year on year. In fact, the Office for National Statistics shows that ‘the number of self-employed workers has increased from 3.3 million in 2001 to 4.8 million in 2017’. More and more people are taking the plunge and becoming their own boss – but what do you need to know when it comes to managing your accounts and finance?

Managing your own accounts as a freelancer can be pretty overwhelming. There’s a lot to think about, a lot of jargon to tackle, and failing to comply with HMRC guidelines can result in penalties which we’re sure you’d rather avoid!

To help give you an overview of what you need to consider, our partners, Mazuma Accountants, have pulled together some of the accounting basics for freelancers. We hope this guide will give you a well-rounded idea of the financial responsibilities you’ll have as a freelancer, and how best to address them.

Income Tax

As a freelancer you’re required to pay Income Tax*, the amount of which is calculated based on your earnings. You pay 20% tax on your profits above the Personal Allowance threshold and below the upper limit of the basic rate. Anything within the higher rate increases to 40%, and the additional rate increases further to 45%.

Here’s a breakdown from the HMRC site:

Band Taxable Income Tax rate
Personal allowance
Up to £12,500
0%
Basic rate
£12,501 to £50,000
20%
Higher rate
£50,001 to £150,000
40%
Additional rate
Over £150,000
45%

The rate is only applied to the profit you make above those amounts specifically, not your entire profit. For example, if your profit is £50,000 in the 2020/21 tax year, you won’t pay tax on the first £12,500, but you will have to pay 20% tax on £37,500 – the difference between £12,500 and £50,000.

National Insurance

If you’re self-employed, you usually pay two types of National Insurance:

  • If your profits are £6,475 or more a year, you pay Class 2 National Insurance, This is a flat rate of £3.05 per week.
  • If your profits are £9,501 or more a year, you pay Class 4 National Insurance, This involves paying 9% on profits between £9,501 and £50,000, and 2% on profits over £50,000

Let’s put this into practice and say that your profits from self-employment are £20,000 for the entire year. In this situation, you’d be required to pay the following:

  • Class 2 National Insurance for 52 weeks (£158.60) and;
  • Class 4 National Insurance on the remaining £10,500 (£945.00).

In total, you’d need to pay £1,103.60.

You can pay for your National Insurance through your Self Assessment tax return, which we’ll get onto next!

Self-Assessment tax returns

If you’re self-employed, or a director of a company, or receive any other non-taxed income, then you’ll need to file a Self Assessment tax return. It’s HMRC’s way of collecting Income Tax. For the 2020/21 tax year, you’ll need to register for Self Assessment by 5th October 2020, and submit your online tax return by 31st January 2021, or by post on 31st October 2021.

In order to correctly submit your self-assessment tax return, it’s important to keep any records (such as receipts, bank statements, invoices etc) throughout the tax year. You will then use these records to input the figures into your tax return. When you submit this information to HMRC, they will calculate your taxable profits and tax bill and let you know what you owe.

Making Tax Digital

Making Tax Digital is the newly introduced government scheme which means that all tax returns need to be submitted digitally. The documents you’d usually submit as part of your Self Assessment will need to be submitted directly to HMRC online using Making Tax Digital (MTD) compliant software. Although changes won’t be mandated until 2021, it’s important that as a freelancer, you understand the regulations and ensure that you make the switch to MTD compliant software.

You can find out more about Making Tax Digital on Mazuma’s website.

Expenses

One of the great things about being self-employed is that you’re able to offset some of your business expenses against your income – providing that they’re allowable expenses. In other words, you’ll only be taxed on your profits.

There’s a lot to cover when it comes to what you can and can’t claim for, so we’d recommend heading over to the HMRC website for all the ins and outs, but here’s a brief outline of what’s classed as an allowable expense:

  • Office costs such as stationery or phone bills
  • Travel costs including fuel, parking and public transport fares
  • Clothing expenses for uniforms
  • Staff costs including salaries or subcontractor costs
  • Items you buy to sell on such as stock or raw materials
  • Financial costs including insurance or bank charges
  • The cost of running your business premises, for example heating, lighting, business rates
  • Advertising or marketing which includes things such as website costs
  • Training related to your business

Using an accountant

As you can probably tell, there’s a lot to digest when it comes to accounting as a freelancer! It can be tricky to keep on top of everything, which is where an accountant can be really handy.

Mazuma works with freelancers on a regular basis, helping them manage their accounts in a cost-effective and hassle-free way. In other words, their service is efficient and it doesn’t break the bank!

Their service is fully online, which helps them keep their costs low and it means that you don’t have to worry about spending time travelling to and from meetings. You can also submit all of your invoices digitally (although you can post them to them too if you prefer!). Their monthly accountancy package includes everything you need:

  • Monthly management of your accounts
  • Bookkeeping
  • VAT returns
  • Self-assessment tax return
  • Statutory year-end accounts

Online accountancy that works for you!

Create Insurance customers can get the first 3 months accounting for free from Mazuma.

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