Freelancer tax in one paragraph: as a sole trader you pay income tax on profits (revenue minus allowable expenses) at marginal rates 20/40/45%, plus Class 4 NI 6%/2%. The £1,000 trading allowance is the floor — no SA required below that. Cash basis accounting is the default for most freelancers (income/expenses on receipt/payment). split tax across kicks in at £90,000 turnover. Payments on account split tax across the year if your prior-year liability exceeded £1,000. Use a separate business bank account — it's not legally required for sole traders but saves enormous accounting time.
Registering as self-employed
You must register for Self Assessment by 5 October following the end of the tax year in which you started earning self-employed income above £1,000. Practical steps:
- Visit gov.uk/register-for-self-assessment
- Choose "Self-employed" and complete the form (takes 10 minutes)
- HMRC issues your UTR (Unique Taxpayer Reference) within 10 working days
- You'll also be assigned an SA agent code if you're using an accountant
- You can sign up for Making Tax Digital for Income Tax Self Assessment (MTD ITSA) when it applies — phased rollout from April 2026 for higher-income sole traders
Late registration: penalties up to 100% of the tax due. Don't delay.
Cash basis vs accruals — which to use
| Aspect | Cash basis | Accruals |
|---|---|---|
| How income is recognised | When received in your bank | When invoiced/earned |
| How expenses are recognised | When paid | When incurred/billed |
| Stock value carried over | Not tracked | Tracked (cost of goods sold) |
| Interest paid on business loans | Capped at £500/year deductible | Fully deductible |
| Suitable for | Service businesses, simple operations | Stock-heavy or invoice-significant businesses |
| Threshold | Turnover under £150,000 (or you can opt in regardless) | Anyone |
For 95% of freelancers (service-based, no stock), cash basis is simpler and produces the same tax over time. The main caveat: if your year-end has lots of outstanding invoices, cash basis defers tax on those until the next year — a one-off benefit at startup.
The £1,000 trading allowance
HMRC's £1,000 trading allowance:
- If your gross trading income is under £1,000/year: you don't need to declare it on Self Assessment
- If gross income is over £1,000: choose between (a) claiming actual expenses, or (b) claiming the £1,000 allowance as your only deduction
- Most freelancers have actual expenses exceeding £1,000, so claim actuals
The allowance is per-person, not per-trade. A freelancer with two side gigs has one £1,000 allowance total.
Allowable expenses — what HMRC accepts
Expenses must be "wholly and exclusively" for business purposes:
| Category | Examples |
|---|---|
| Office and equipment | Laptop, monitor, desk, chair, software subscriptions, accountancy software |
| Home office | £6/week simplified, or actual proportion of household bills (split by hours/rooms) |
| Travel | Mileage at 45p/25p, train fares to client meetings, parking, subsistence on overnight trips |
| Phone and broadband | Business portion of bills (typically 50-70% for full-time freelancers) |
| Marketing | Website hosting, domain, online advertising, business cards, portfolio costs |
| Insurance | Professional indemnity, public liability, contents/computer insurance for business equipment |
| Training | Courses to maintain (not extend) skills, books, professional journals |
| Subcontractor costs | Other freelancers you've subcontracted to — fully deductible |
| Bank charges | Business bank account fees, payment processing fees (Stripe, PayPal) |
| Subscriptions | Professional bodies on HMRC List 3 |
NOT deductible: ordinary commuting (home to a single permanent client), standard clothing, food during normal working hours (not travel), client entertainment.
VAT — when to register
The VAT registration threshold is £90,000 of taxable turnover in any rolling 12-month period (raised from £85,000 in April 2024). Three scenarios:
- Turnover under £90,000: registration optional. Voluntary registration can be beneficial if you sell B2B and your clients are VAT-registered themselves.
- Turnover £90,000 - £100,000: mandatory registration. Choose between standard VAT, Flat Rate Scheme, or Cash Accounting Scheme.
- Approaching £90,000: watch the rolling 12-month measure carefully. If you breach by accident, the 30-day notification rule applies.
The Flat Rate Scheme (FRS) simplifies VAT — you pay a flat percentage of gross turnover (varies by sector, often 14-16% for service industries) instead of full input-output VAT accounting. Below ~£150k turnover with low business inputs, FRS often saves money compared to standard VAT.
See our VAT Flat Rate Scheme guide for the math.
Payments on account — the cash flow surprise
If your Self Assessment liability exceeds £1,000 in a year, HMRC requires "payments on account":
- 31 January: balancing payment for the prior tax year + first payment on account for the current tax year (50% of last year's liability)
- 31 July: second payment on account (another 50% of last year's liability)
- Following 31 January: balancing payment based on actual liability for that year
First-year freelancers are hit hardest: at first January deadline, you owe (a) full year's tax for first year + (b) 50% on account for second year. Effectively 150% of your first year's tax due in one January.
Plan ahead: set aside 25-30% of every freelance invoice in a separate tax savings account.
Worked example: full-time freelancer, year 1
Mr S leaves employment in April 2026 to freelance. Turnover £55,000 in tax year 2026/27.
- Turnover: £55,000
- Expenses claimed: £8,000 (home office, equipment, software, phone, travel, accountancy)
- Taxable profit: £47,000
- Personal Allowance: £12,570
- Income tax: (47,000 - 12,570) × 20% = £6,886 (entirely basic rate)
- Class 4 NI: (47,000 - 12,570) × 6% = £2,066
- Total tax: £8,952
- Net income after tax: £38,048 / 55,000 = ~69%
January 2028 payment: £8,952 balancing + 50% on account = £13,428. July 2028: another £4,476. Plan for it.
Common freelancer tax mistakes
- Mixing personal and business finances. Even though sole traders can legally use one account, doing so makes Self Assessment a nightmare. Open a business bank account.
- Forgetting payments on account. Year 1 cash flow trap.
- Under-claiming home office. If you genuinely work from home, claim the simplified rate (£6/week / £312/year) or the actual proportion.
- Voluntary VAT registration without thinking. Adds admin without saving unless your clients are VAT-registered and your inputs are significant.
- Not separating pension and personal savings. Self-employed have no auto-enrolment safety net. Open a SIPP and contribute regularly.
- Treating PayPal / Stripe income as "different". All trading income is taxable, regardless of payment processor.
- Missing the MTD ITSA transition. From April 2026 for higher-income sole traders, quarterly digital filings begin replacing the single-annual SA submission.
Sources
Related profession-specific guides
How UK Tax Drag holds itself to account
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