A guide to paying freelance tax

Freelancers are an important part of the UK economy. Figures from the Association of Independent Professionals and the Self-Employed (IPSE) show there were more than 2 million freelancers in the UK in 2023 and they contribute an estimated £169 billion to the economy.

What is a freelancer?

A ‘freelancer’ is someone who works for themselves, often selling services on a contract-by-contract basis for several clients. They enjoy the flexibility of working for themselves but tax rules around freelancing have got increasingly complex in recent years. Other terms for freelancers are contractors and consultants.

Freelancers are self-employed and are responsible for their own taxes, which includes Income Tax, National Insurance Contributions (NICs), and Value Added Tax (VAT). 

Understanding your Business Structure 

Freelancers can operate in a variety of business structures. Choosing the right business structure is crucial, each structure has its own advantages and disadvantages including: 

• Sole trader: A sole trader is a self-employed individual who runs their own business and is the simplest business structure, however sole traders are personally liable for business debts. 
• Limited company: A personal service company is a company with a sole shareholder and director. A limited company is a distinct legal entity separate from its shareholders and directors. This means they are only responsible for the amount of money that they put into the business.
  Umbrella company: An umbrella company is effectively the employer of a freelancer or contractor. Working through an umbrella company means they operate a payroll and may lead to higher tax and National Insurance deductions compared with a PSC.

A PSC may fall under IR35 or ‘off-payroll’ rules. IR35 anti-avoidance tax legislation is designed to tax people who use PSCs to work as ‘disguised’ employees. If a PSC is covered by IR35 or ‘off-payroll’, more tax and National Insurance will generally be due.

An accountant can advise on whether you should operate as a sole trader, limited company or use an umbrella company.

Tax for freelancers

Freelancers operating as a sole trader - income tax on trading profits at a rate of up to 45% (48% in Scotland). The rate of income tax you pay is dependent on how much you earn and what tax band you are in, which we cover in the next section.

Freelancers operating as a limited company - the company must pay corporation tax at either 25%, or 19% on company profits. Directors and sole traders have to pay income tax on amounts extracted from your limited company.

Freelancers also pay National Insurance Contributions.

How much can you earn freelance before paying tax?

Freelancers operating as a sole trader pay income tax on trading profits above the personal allowance of £12,570 at rates of up to 45% (48% in Scotland). Those running a limited company pay income tax on any salary and dividends they take from the business.

Income tax rates are as follows:

England, Wales and Northern Ireland - 2024/25 and 2025/26

Tax band	Taxable income	Tax rate
Personal allowance	Up to £12,570	0%
Basic rate	£12,501 to £50,270	20%
Higher rate	£50,271 to £150,000*	40%
Additional rate	Over £125,140	45%

*The personal allowance reduces by £1 for every £2 of income above £100,000.

Scotland - 2024/25

Tax band	Taxable income	Tax rate
Personal allowance	Up to £12,570	0%
Starter rate	£12,571 to £14,876	19%
Scottish Basic rate	£14,877 to £26,561	20%
Intermediate rate	£26,562 to £43,662	21%
Higher rate	£43,663 to £75,000	42%
Advanced rate	£75,001 to £125,140**	45%
Top rate	Above £125,140	48%

**There is no personal allowance for income above £125,140. 

Scotland - 2025/26

Tax band	Taxable income	Tax rate
Personal allowance	Up to £12,570	0%
Starter rate	£12,571 to £15,397	19%
Scottish Basic rate	£15,398 to £27,491	20%
Intermediate rate	£27,492 to £43,662	21%
Higher rate	£43,663 to £75,000	42%
Advanced rate	£75,001 to £125,140**	45%
Top rate	Above £125,140	48%

**There is no personal allowance for income above £125,140. 

Limited company directors pay income tax on any salary that they take from their business at the above rates. Where they decide to withdraw part of the profits as dividends, they must pay income tax on these dividends.

The dividend allowance applies a nil rate of tax on the first £500 of dividends. 

Beyond that, the dividend tax rates are as follows:

	2024/25	2025/26
Basic rate taxpayer	8.75%	8.75%
Higher rate taxpayer	33.75%	33.75%
Additional rate taxpayer	39.35%	39.35%

For more details of the tax you pay on dividends, please click here.

National Insurance payments

As well as being liable to pay income tax, freelancers will also need to pay National Insurance Contributions (NICs).

National Insurance classes are as follows:

National Insurance class	Who pays
Class 1	Employees under state pension age and earning above a certain threshold pay class 1. They are automatically deducted by the employer.
Class 1A or 1B	Employers must also pay employer contributions for each employee and more details about the employer contributions which may be due can be found here. Paid directly by employers on their employees’ expenses or benefits.
Class 2	Self-employed individuals earning profits of £6,725 or more are no longer required to pay class 2 NIC. Those earning below £6,725 may wish to make voluntary contributions.
Class 3	These are voluntary contributions that can be paid to fill or avoid gaps in the individual’s NIC record.
Class 4	The self-employed also pay NICs on an annual basis as Class 4 NICs.

Dividends do not attract NICs and extracting profit as dividends can create tax and NICs efficiencies.

What is IR35?

IR35 describes a set of rules that aims to combat alleged tax avoidance by contractors and the clients they do work for. The IR35 rules look at whether the contractor should be be considered an employee, if the intermediary was not used.

If the contractor is found to be a ‘disguised employee’ and inside IR35, the rules broadly require that the contractor must pay income tax and NICs as if they were an employee.

IR35 is complicated to understand so it is advisable to get help from a professional accountant.

How to pay tax on freelance work

Freelancers pay tax on their personal income after submitting a self assessment tax return. You must register as self-employed with HMRC by 5th October after the end of the tax year during which you became self-employed. You need to file a self assessment tax return online and pay any tax due by 31st January, following the end of the relevant tax year. You face financial penalties if you miss the deadline so there are many benefits to filing a tax return early.

A freelancer’s tax bill is generally paid in two instalments by 31st January and 31st July each year. These are known as ‘payments on account’. Each payment on account is broadly 50% of the prior year’s income tax.

If you run a limited company, the company will need to pay corporation tax and file a company tax return and company accounts. If you operate through a limited company, you need to submit a company tax return to work out your corporation tax bill.

Limited company directors are also required to file company accounts with Companies House and submit a personal self-assessment tax return that reports their salary and dividends received through the company.

Freelancers may also need to register for Value Added Tax (VAT) where total VAT taxable turnover for the last 12 months was over £90,000 or you expect your turnover to go over £90,000 in the next 30 days. VAT is generally paid by submitting quarterly VAT returns.

The process of paying tax can be complex. To ensure the accuracy of the information that you send to HMRC and to maximise the benefits of tax reliefs and allowances, speak to your accountant for advice.

What expenses can I claim as a freelancer?

Deducting all allowable business expenses will reduce trading profit and save you tax. You should keep accurate records of all business expenses.

Many freelancers work from home. In this case, the rules allow you to claim tax relief on part of your household expenses.

Common allowable expenses for freelancers include:

• travel (fuel, train and bus tickets)
• premises (heating, business rates, rent)
• staff salaries
• admin costs (stationery, advertising and subnscriptions)

The rules are slightly different for limited companies but all expenses must generally be incurred “wholly and exclusively” for the day-to-day running of your business.

Need help with your freelance tax?

For assistance with your tax obligations as a freelancer, book a free consultation with our tax experts by calling 0203 827 6000 or contact us using our online enquiry form.

Last updated: 17th January 2025