Freelancers' Questions: Do employees who freelance get the personal allowance?

Freelancer’s Question:

I am a salaried employee earning £30,000 a year, but I often get approached for freelance work, online, too. I'd like to take some of this up. I've read that for freelancers there is a personal ‘tax-free’ allowance of over £12,000 -- would this be applicable in my case too, or because I already earn £30k in a salaried job, does that mean I don't get a personal allowance for freelance work?

Also, when I start the freelance work, would I be able to claim the expense of the cost to me of a local co-working hub, because I’d like to work there rather than at home? Would the clients likely pay the hub’s monthly subscription fee or do I take it up with the taxman?

Freelancers' Questions: Do employees who freelance get the personal allowance?

Expert’s Answer:

Unfortunately for you, the personal allowance of over £12k (it is in fact £12,500), is the allowance for the tax year to be set against your total income. As you have indicated, that allowance already goes against your salaried income, so any earnings from freelance work will be taxable in full (subject to deductions for expenses associated with your freelance earnings, such as the co-working hub you mention).

Charging clients 

It is up to you and your client to agree on the basis of the charge for your services. This would normally be either on a rate per hour/day but could be on a project-based fee. In either case, you might want to take into account the cost of the co-working hub in setting the rate/fee, but you wouldn’t normally charge the client, separately, for that cost. You could of course try, but I very much doubt that they would take it very well!

Remember that when you ‘claim’ for a cost such as this from the taxman, you are only claiming tax relief.  For example, if you pay £100 for a business expense, this can be deducted from your profits. If your profits are taxed at, say, 20%, then you obtain tax relief at 20% on the £100 cost. So, the net cost to you is £80.

Register as self-employed

Freelance work such as this is often undertaken on a simple, self-employed basis (but see this answer’s final paragraphs for a caveat). You would, therefore, need to register as self-employed and will need to report your ‘profit’ to HMRC via a self-assessment tax return each year.

Your profits are the income less any costs specifically connected with generating that income. The general rule for expenses is that the cost has to be 'wholly and exclusively' for the purpose of the business. So the cost of the co-working hub, for example, would be allowable assuming you only incur that cost in connection with undertaking the freelance work there.

Personal Allowance applies to total income 

If your salary is £30,000, as you have indicated, the first £12,500 is covered by your personal allowance and the remaining £17,500 is taxed at 20%.

There is a further £20,000 of basic rate tax band available for your profits from your freelance work, so profits up to that amount will be taxed at 20%.  If your profits are greater than £20,000, the excess will be taxed at 40%.

You will also pay National Insurance on your self-employed profits of £3 per week (if your profits are over £6,365), plus 9% of your profits in excess of £8,632.

If the freelance income is likely to be significant or starts to become so over time, it would be worth getting advice from an accountant about whether to operate through a limited company. In any event, companies offering freelance work often require the freelancer to operate through a limited company, partly because it helps address the risk that you could be considered the company’s employee.

The expert was Graham Jenner, a director of Jenner & Co chartered accountants.


18th July 2019

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