A Complete Guide to Self-Assessment for Freelancers

Operating as a freelancer, working for yourself, and holding yourself accountable for the successes and failures of your business is ‘part and parcel’ of the freedom granted by self-employment.

A Complete Guide to Self-Assessment for Freelancers

And if you choose to freelance as a sole trader, you will have complete autonomy over your business while being bound by financial reporting responsibilities to HMRC, albeit more limited than if you were a limited company.

What is self-assessment, and what does it mean for freelancers?

As a freelancer, you should be registered as self-employed with HMRC and will therefore be required to submit an annual Self-Assessment tax return.

In broad terms, being a self-assessor means you will need to summarise your annual income by submitting a tax return and retaining evidence to back up your income sources and financial activity -- for seven years.

Here, exclusively for FreelanceUK, is a complete guide to self-assessment and tax returns for freelancers, including deadlines, penalties and what it means to make a ‘payment on account,’ writes David Tattersall of online accountancy network Handpicked Accountants.

What is a Self-Assessment tax return?

A Self-Assessment tax return (Form SA100) for freelancers is a formal overview of your business’s sales, expenses, and tax liabilities.  

You may enlist a professional accountant to help prepare your tax return online on the HMRC website, or through a paper form. HMRC will calculate how much tax is due based on the information provided from your records i.e. bank statements and invoices.

What information for HMRC do self-assessors need to include?

You will need to include the following information on your Self-Assessment tax return:

You will need your National Insurance number, UTR (‘Unique Taxpayers Reference’), income records and details for pension and charitable contributions.

How much is self-employed National Insurance?

Once your Self-Assessment tax return is submitted, you will need to pay your tax bill comprising income tax on profits and National Insurance Contributions (NICs).

As a self-employed professional, you will typically pay two types of National Insurance Contributions:

  • Class 2 – if you earn £6,515 in profits or more a year
  • Class 4 - if you earn £9,569 in profits or more a year

If this already sounds too numbers-led for your liking, consider that cloud accounting software can collate income records under a single dashboard by importing receipts and invoices. It can also flag filing and payment deadlines and help you avoid unexpected penalties.

Deadlines for Self-Assessment tax return for freelancers: key dates

If you did not submit a Self-Assessment tax return last year, you will need to register for self-assessment if you’re self-employed, for which the deadline is October 5th 2021. If you fail to register, you could be fined.

Self-Assessment tax is based on your income from the previous year, so for the tax year 2020-2021, your return will be due the following year -- in January 2022.

Paper tax returns deadline – October 31st 2021

Online tax returns deadline – January 31st 2022

Tax payment deadline – January 31st 2022

If you are up to three months late to file your tax return with HMRC, you will be fined £100 and if you are more than six months late, you will incur further penalties.

Penalties, payments on account and balancing payments

You can calculate your penalty on the HMRC website if you are late filing your Self-Assessment tax return or making your tax payment which will also be subject to interest.

If you pay your tax in advance, this is known as ‘Payment on Account’ which is split in half across two payments and helps freelancers spread costs. Your payment on account will be based on your previous year’s tax bill and helps HMRC forecast future tax bills. If you still have outstanding taxes, you must make a ‘balancing payment’ by January 31st the following year.

Freelancers, be aware – there are two payment on account deadlines (and one of them could be imminent for you):

First payment on account – January 31st

Second payment on account – July 31st

If you overpay, you will be issued a refund, or if you expect your tax bill to be lower, you can ask HMRC to reduce your payment on account. You can reduce your payment on account online or complete an SA303 form (to be sent to HMRC by post). But if you underpay, you will be charged interest.

What is a Time to Pay Arrangement?

Deadlines are not only confined to January and July however, if those months aren’t going to be financially viable for you as a freelancer! In fact, if you are struggling to afford your incoming tax bill, you can go forward to HMRC to negotiate an affordable payment plan, also known as a Time to Pay Arrangement (TTP). This option will help you spread your tax payments across 12 months, giving you sufficient time to raise funds and protect the financial position of your business.

Final thought: don’t go it alone!

But like other aspects of self-assessing as a self-employed freelancer, going it alone isn’t advisable! Choosing a freelancer accountant to manage your tax and financial reporting duties can help you focus on your business while the administrative tasks are well tended to by accounting specialists.