Freelancing offers incredible flexibility and independence, but it also comes with significant responsibilities for freelancers, particularly around managing taxes and finances. Staying on top of your obligations can feel daunting, but with the right approach, it doesn’t have to be.
Here’s a simple guide to staying compliant, avoiding unexpected bills, and keeping more of your hard-earned income in your pocket.
Claim All Your Allowable Expenses as a Freeleancer
One of the most effective ways to reduce your tax bill is by claiming every allowable business expense. Yet, many freelancers miss out on deductions they’re entitled to, leaving money on the table.
Here are some expenses you may not realise you can claim:
- Home office costs – If you work from home, you can claim a proportion of your rent, utilities, and internet bills. HMRC allows reasonable apportioning based on the space you use for business.
- Travel expenses – Business-related travel, including mileage, public transport, and hotel stays, is deductible. Keeping detailed records of your journeys is essential.
- Software and subscriptions – Whether it’s accounting software, design tools, or project management apps, if it’s used exclusively for business, you can claim it.
If it’s necessary for your work, track it and claim it. Every legitimate expense reduces your taxable income, meaning more money stays with you.
Tax and National Insurance for Freelancers
Unlike traditional employment, freelancers don’t have tax deducted at source. It’s up to you to set aside enough to cover your tax and National Insurance (NI) contributions.
Here’s a straightforward way to manage this:
- Save 25–30% of each invoice – Transfer this into a separate savings account specifically for taxes. This ensures you won’t accidentally spend money that belongs to HMRC.
- Understand NI contributions – Freelancers are responsible for Class 2 and Class 4 NI payments. These can add up quickly depending on your earnings, so it’s important to know the thresholds and rates.
By regularly setting money aside, you can avoid the stress and financial strain of an unexpected tax bill.
Pay Attention To The VAT Threshold
Freelancers need to be aware of VAT requirements, especially as their business grows. The current VAT registration threshold in the UK is £90,000 in turnover over any 12-month period.
If you cross this threshold, you must register for VAT. While this may seem like an additional burden, it doesn’t have to be overwhelming.
- Monitor your turnover – Regularly check your income so you don’t get caught off guard. Don’t wait until the end of the tax year to review your earnings.
- Consider the Flat Rate VAT scheme – This scheme simplifies bookkeeping by allowing you to pay a fixed percentage of your turnover, while still keeping a portion of the VAT charged to your clients.
Being prepared for VAT registration can help you stay compliant without disrupting your workflow.
The Bottom Line for Freelancers
Managing taxes and finances as a freelancer doesn’t need to be stressful. By being proactive and organised, you can stay compliant, avoid surprises, and even save yourself thousands.
- Claim every allowable expense to reduce your taxable income.
- Set aside money for taxes and NI contributions to stay ahead of bills.
- Keep a close eye on your turnover to ensure VAT compliance.
With these steps, you’ll protect your business and ensure it remains profitable and sustainable.
If you’d like support navigating the complexities of freelance finances, our team is here to help. Whether it’s expense tracking, tax planning, or VAT registration, we can take the pressure off and provide tailored advice to keep you on track.
At Nordens we offer expert advice and assistance with all of your business needs: from your everyday accounting to Advisory, Tax, Audit and more.
If you need support with any of the above or just want to speak to a member of the team, get in touch today.
