The tax issues facing contract workers

It is becoming increasingly common in the UK economy for people to opt for freelance or contractual work over the traditional employer-employee relationship. There are many advantages to this approach, not least the freedom that it offers to individuals to work in a way that suits them and to pursue their ambitions, with no theoretical limit to what you can earn.

However, while working as a freelancer can have major benefits, there is one particular issue that is often a stumbling block for people who go down that road, and that is the thorny subject of tax. When you’re working as a regular employee, your employer takes care of your tax contribution, but when you’re a freelancer, tax becomes your responsibility to take care of. Here are the main points that you need to consider when looking into dealing with tax matters as a freelancer.

Sole trader or limited company?

The first decision to make as a freelancer is usually whether to work as a sole trader or to set up a limited company. As a sole trader, there is no legal distance between you and your business. If you incur debts as a sole trader, you will be personally liable for them. If you opt to set up a limited company, you will no longer be personally liable for any debts incurred by your business. However, you will have additional responsibilities to fulfil as the owner of a limited company. Another increasingly popular approach is to make use of an umbrella company to help cashflow.

Whichever option you choose, you will have to fill in a Self-Assessment tax return every year, declaring in detail your income from your business, your profits, losses, expenses and other information. These forms can be complicated, and it is important to get the details right, or you could face financial penalties. Some freelance operators use accountancy services to help, but others prefer more flexible approaches, such as signing up for an umbrella company service that will make it easier to handle the wide range of tax and expenses issues through apps and online assistance.

Income tax and National Insurance 

As a freelancer, you will be liable to pay income tax, which varies according to the level of your income, with the basic rate currently being 20% and the higher rate at 40%. However, income tax calculations also have to include the tax-free allowance and factor in any other tax already paid, perhaps through additional salaried work or carried over from earlier tax years. In addition to income tax, there is National Insurance to consider. You will have to make arrangements to pay Class 2 National Insurance, and, once your profits reach a certain level, Class 4 National Insurance.

Expenses issues 

Your tax bill can be reduced by deducting allowable expenses from the amount of your income that is taxable. This is something that you will not have encountered as a salaried employee, but it is a vital part of being freelance, and understanding the complexities of the expenses arrangements can enable you to save significant sums of money as a freelancer, depending on your circumstances.

Conclusion

Being a freelancer has many benefits, and it is likely to become ever more common as a changing economy and advancing technology enable ever more flexible and mobile working. By making sure that you have your tax issues covered, you can be free to explore and grow your freelance business.