If you’re doing freelance work while you are employed, then you are probably wondering whether you are allowed to do so and what the implications are on the tax side of things and whether you need to tell your employer.
Here you’ll find out that you’re not alone when it comes to doing freelance work while you’re employed and what you need to do when it comes to your employer and taxes.
Can You Work as a Freelancer While You’re Employed?
In short, yes – in most cases there are no legal reasons that stop you from doing freelance work while you’re employed. In fact, there are many people freelancing on the side to earn some extra money or as a stepping stone to going self-employed full-time.
Do You Need to Tell Your Employer that You’re Freelancing?
If you are contractually obliged to let your employer know about your freelancing, then you may need to tell your boss. You may also be prevented from setting up a competing business in your contract. So make sure you check your employment contract because you don’t want to jeopardise your day job or get into a legal battle.
If you’ve checked your contract and can’t find any legal reasons that prevent you from working for yourself, then it’s up to you to decide whether you tell your boss about your side hustle.
Does Freelancing Count as Self-Employment?
In most cases, the money you earn from freelance will count as taxable income and is being paid to you by your clients without any tax deducted.
It’s unlike the money you get paid by your employer which has deductions made for income tax, national insurance and pensions made from it before you get paid. You’ll find details of these deductions on your payslip.
When you are freelancing it’s up to you to work out how much extra income tax and national insurance you owe and pay them over to HMRC in accordance with the rules of self-assessment.
What is Self-Assessment?
Self-assessment is the process created by HMRC that allows anyone who receives untaxed income to declare it to the government and pay any tax due. The way you do this is by registering for self-assessment to fill in a tax return.
What is a Tax Return?
A tax return is a form issued by HMRC (also known as an SA100). It contains lots of different sections and boxes that you need to fill in to declare your freelance income. Once completed, HMRC will then calculate how much tax you owe ready for you to pay them.
You need to fill in your tax return by the 31 January each year summarising all your earnings for the previous tax year. The tax year runs from 6 April to 5 April each year. So a tax return due by 31 January 2023 would contain all your earnings between 6 April 2021 to 5 April 2022.
When to Register as a Freelancer with HMRC
The quickest and easiest way to register to work for yourself with HMRC is to register as self-employed. You can choose to do this once your freelancing income (not profit) goes over £1,000 during a tax year if you like by taking advantage of the £1,000 trading income allowance.
The deadline for registering is the 5th October following the end of the tax year you started freelancing or your income goes over the £1,000 limit.
There are other business structures out there including a Limited Company which may offer better tax savings depending on your earnings. Read this guide to find out more about this and other UK business structures.
Will HMRC Tell Your Employer that You Are a Freelancer?
No HMRC will not tell your employer. Your tax status is completely confidential. But if you fall behind on your taxes HMRC may change your tax code to help you pay off your debt.
In these cases, HMRC will notify your employer to change your tax code but they won’t say why the change needs to take place.
How Much Tax Do You Pay as a Freelancing and Being Employed?
When you’re self-employed you’ll pay income tax, Class 2 and Class 4 national insurance on your freelancing profits. Profit means all your income minus expenses you can claim as a tax deduction.
Income tax starts at 20% on all your income (not just from freelancing) over £12,570 and 40% over £50,270. Class 2 National Insurance is paid as a set weekly amount when your income goes over £6,725 and Class 4 is worked out as 9% on your earnings over £9,880.
Read this guide to find out more about tax when you’re employed and self-employed and see some examples.
Tax Deductions for Freelancers
Claiming for allowable business expenses is the easiest way to reduce your tax bill when you’re self-employed. Typically, most of the things that you pay as a freelancer will be tax-deductible such as insurance, your laptop and business travel.
There may be some expenses you pay for that you use personally and for work, such as your mobile phone. In these cases, you can only claim a portion as a business expense. So, say you use your mobile phone for 60% work and 40% personal, then can claim 60% of the total bills to put against your taxes.
While most things you pay for as part of being a freelancer are tax write-offs, there are some things you may pay for that you cannot deduct against your taxes. This includes things like:
- Fines and penalties eg: parking fines
- HMRC interest and penalties
- Training and courses for new skills
- Food, except in certain circumstances
- Personal expenses
Read this guide to find out more about claiming self-employed expenses and get your free expenses cheat sheet.