The pandemic has changed the way many of us work in lots of ways – whether that’s working from home more or all the time, trying to achieve a better work-life balance or becoming one of the many people who have set up a new business or started freelancing.
Many new small businesses have sprung up in the past few months from home – it could be cake decorating, building your own client business using your current job skills or perhaps creating something you love, such as woodwork.
But a lot of people are fitting in their freelance work around their current employment as it takes a huge leap of faith to quit a secure job and you need to know it’s going to work out.
So what are my first steps when I start freelancing?
We at Kew Accountants can definitely help you know what steps to take!
It is possible to be employed and self-employed at the same time and is quite common.
You must register for self-assessment with the HMRC – here’s the link – https://www.gov.uk/log-in-file-self-assessment-tax-return/register-if-youre-self-employed
If you are already paying tax on earnings from your employment through PAYE, you still need to declare your freelance income to the HMRC.
Don’t delay doing this as there are fines if you are late. The deadline is October 5 after the end of the tax year during which you became freelance.
You also need to decide whether you will set up as a sole trader or a limited company.
Most people starting out with a small business choose to be a sole trader, which is a great first step.
Should I register for VAT?
If your turnover is more than £85,000 in a tax year, you must register with HMRC for VAT. Otherwise, it is voluntary. However, it can still be a good thing to do as you can reclaim VAT on goods and services your business buys. It will add to your clients’ bills but often, they can claim it back too.
How do I work out how much tax to pay?
As an employee, your company will sort this out for you. But as a freelancer, you will need to work it out. You can also hire an accountant to do this for you.
Everyone is allowed to earn a certain amount a year before paying tax. This is currently set at £12,570
If you are a freelancer and an employee, your new profits could push you into the higher-rate tax band. You will be taxed at 40 percent of your earnings.
Some expenses can be claimed before the total of your income to be taxed is calculated. This could be things such as internet bills, telephone bills or stationery.
When do I pay my tax?
You must fill out the self-assessment form for the previous tax year by October 31 if it is by post or online by January 31. But January 31 is also the deadline to pay your tax bill so it’s better to do it earlier.
And what about my National Insurance?
If you are working as a freelancer while keeping your current employment, there won’t be an impact on the national insurance you pay through your employment.
But as a self employed worker you will pay two lots of National insurance. Class 2 National Insurance is paid if your profits are more than £6,515, This is charged at £3.05 a week payable in one go on 31st January following the relevant tax year.
You will also pay class 4 National insurance at a rate of 9% on profits over £9,568 (going up to 10.25% next year).
Setting up a Freelance business on the side is definitely a great way to test the market but just make sure you research your tax on the side too.