TAXO'D.  Simple tax accounting solution for freelancers. Tax return, done.


Dave Legion

Dave Legion

May 10, 2023

How to calculate your Income Tax as a Freelancer

A Simple guide to calculating your Income Tax if you are Self-Employed (UK)

As a freelancer, how do I calculate how much Income Tax I owe? 

You don't need to know the ins and outs of every single aspect of tax as a freelancer, but it certainly puts you in a stronger position if you can understand some areas of it. And if one of those areas can be 'Income Tax' then you are in for some smoother sailing. 

If you are not working for an employer in a PAYE scenario, it is essential that you know how much income tax you will be paying at the end of the tax year. Knowing what you owe means you can 'hold back' the money that you will need to pay your tax bill with. You will be able to pay it on time too. Which will keep you in the good books of HMRC, and more importantly - #keepyoupenaltyfree

TAXO'D (the personal tax app) has put together this guide to outline some of the things you need to be aware of when calculating your taxes. 

What Income Tax band am I in?

In the UK all tax payers are given a 'Personal Allowance', which you will be delighted to learn is tax-free! The first £12,500 you earn per year (even those in the higher rate and additional rate tax bands) does not carry a tax bill whatsoever. However, if you earn over £125,000 then you do not get any tax free personal allowance.

The percentage of income tax that you pay on your earnings is dependent on what tax band you find yourself in. In the UK there are three bands: 

  • Basic Rate. 20% Tax (Earnings £12,501-£50,000)
  • Higher Rate. 40% (Earnings £50,001-£150,000)
  • Additional rate. 45% (Earnings £150,001 >>>>and BEYOND)
TAXO'D TOP TIP - If you are lucky enough to earn over £100,000 then your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your Personal Allowance is zero if your income is £125,000 or above. 

Do I pay the same amount of Income Tax on my earnings?

No, you do not pay the same amount of Income Tax on your total earnings as some of your earnings may fall in the Higher Rate band while the rest may fall in the Basic Rate band. 

eg. An Independent Hero earning £67,000 would pay 0% on the initial £12,500, 20% on anything from £12,501 to £50,000, and 40% on the remaining £17,000.

Self Assessment tax return software like TAXO'D can automatically calculate your taxable income and estimated tax bill based on the tax profile you set up and the income and expense information you input.

TAXO'D blog - How to calculate Income Tax

What is National Insurance and do I need to pay it?

National Insurance is a tax on earnings and self-employed profits. 

Your National Insurance contributions (NICs) are paid into a fund, from which some state benefits are paid.

This includes the state pension, statutory sick pay or maternity leave, or entitlement to additional unemployment benefits.

Regular PAYE employees automatically have NICs taken from their monthly wages. Freelancers, on the other hand, must pay it themselves through their Self Assessment tax bill. 

What are my National Insurance Contributions when I'm self employed?

For the Self-Employed, the amount of National Insurance you pay is worked out in a similar way to income tax. National Insurance is calculated on gross earnings (before tax or pension deductions) above an 'earnings threshold'.

If you're self-employed, you could pay two types of National Insurance. 

You pay Class 2 contributions if you're self-employed, which are a flat rate of £3.05 per week in 2020-21, up from £3 per week in 2019-20. 

On profits (earnings minus allowable expenses) below a certain limit you can elect not to pay Class 2 contributions, so you pay no National Insurance at all - that threshold is £6,475 in 2020-21, up from £6,365 in 2019-20.

If your profits are above £9,500 in 2020-21, you must pay Class 4 contributions as well as Class 2 contributions. 

Class 4 contributions are at 9%. Earnings over £50,000 will require a 2% contribution.

In 2019-20, Class 4 contributions were 9% of taxable profits between £8,632 and £50,000. On profits over £50,000, Class 4 contributions were 2% of profits.

TAXO'D takes into account your NI declarations while filing your tax return straight to HMRC.

TAXO'D blog - How to calculate Income Tax

What are other tax benefits to being self employed or a company director

  • Dividends - If you have set up a company then you can look at taking money out of the company as a salary, as an expense, as a directors loan or as a dividend. A dividend is a payment a company can make to shareholders if the company has made a profit.

If paying yourself from a company, you have a dividend allowance (which is tax-exempt) of £2000.00. Beyond that, you will be paying income tax but the tax will be lower than with typical income.

TAXO'D TOP TIP - As the income tax on dividends is lower than with typical income. Many business owners split their earnings between a wage and a dividend, so they minimise their tax exposure and limit themselves to a lower tax band.
TAXO'D blog - How to calculate Income Tax
Dividend Allowances (UK) 2016-2021

  • Marriage Allowance - For married couples, the 'Marriage Allowance' tax break is a special allowance granting your (lesser earning) spouse the ability to transfer any unused, tax-free portion of their 'Personal Allowance' over to your account. The maximum being £1,250, meaning can save up to £250 per year. 

Don't forget your expenses if you're Self-Employed!

Every freelancer will have expenses and these have to be included in your self-assessment to lower your total taxable income. Business mileage? YES . Utilities for your home office? YES . Know exactly what you can claim as an expense.

e.g. As a freelancer earning £68,000 a year, if you have spent £10,000 on business costs then you can deduct that amount off. Leaving only £58,000 as your taxable income. No brainer !

TAXO'D TOP TIP - To legitimise expenses you will need to keep receipts throughout the year. These will need to be tallied with your bank statements if these expenses are to be claimed smoothly and successfully. With Making Tax Digital (MTD) just around the corner (well ..Spring 2023) - it is worthwhile getting into good digital habits.

Why not let TAXO'D tax return app for freelancers handle all of your tax woes?

TAXO'D is a salary tax calculator. You record as you go (on your phone or your computer) day by day, throughout the tax year. As the weeks unfold and you are actively recording your income and expenses. With TAXO'D personal tax app - you will see in real-time displays the tax and National Insurance that you owe.

With TAXO'D tax return software know exactly what tax you owe and when you owe it. Simple. TAXO'D self assessment software does away with the need for an accountant, saving you further money and time If you are earning money independently and responsible for your own taxes then sign up today. And find out why TAXO'D is the best mobile tax tool for freelancers and contractors.

Tax Sucks! Spend less time and money on it with TAXO'D tax filing app

Disclaimer: This is simply a guide and should not be treated as tax advice. Contact HMRC directly if you need tax advice.

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TAXO'D blog Author

Dave Legion

Founder / CEO of TAXO'D

Award-winning freelance Designer, Director & Animator and tax vigalante

TAXO'D.  Beautiful, simple, award-winning, end-to-end accounting solution for freelancers. Record as you go. Know what you owe. Tax return, done. TAXO'D.  Beautiful, simple, award-winning, end-to-end accounting solution for freelancers. Record as you go. Know what you owe. Tax return, done. TAXO'D.  Beautiful, simple, award-winning, end-to-end accounting solution for freelancers. Record as you go. Know what you owe. Tax return, done.
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