Navigating the world of freelancing can be both exciting and challenging, especially when it comes to understanding PAYE, and how the system might affect you.
The PAYE system is one area that often confuses freelancers, and we are frequently answering questions such as:
- How does PAYE affect freelancers?
- Do you need to worry about it if you’re self-employed?
- Can you pay yourself a salary without being on PAYE?
So, let’s have a look and try to break it down in simple terms.
What is PAYE?
PAYE, or Pay As You Earn, is a system used by HMRC to collect Income Tax and National Insurance contributions from employees’ salaries, and from employers in relation to their employees.
As an employee, your employer deducts these amounts from your wages before you receive your pay.
But what happens when you’re a freelancer?
Does PAYE Apply to Freelancers?
The short answer is: it depends.
As a freelancer, you are likely to be either self-employed and operating as a sole trader, or running a limited company.
As a self employed sole trader, you are responsible for handling your own taxes through the Self Assessment system rather than having taxes automatically deducted through PAYE.
However, if you freelance through a limited company (or if you have a side job where you’re employed), PAYE might still be relevant.
Freelancing Through a Limited Company
If you’ve set up a limited company to run your freelance business, you might choose to pay yourself a salary.
If this is the case, your company becomes your employer. You’ll need to operate PAYE, which includes submitting Real-Time Information (RTI) to HMRC every time you pay yourself, and occasionally filing an Employer Payment Summary (EPS) to report any adjustments.
Depending on your salary level, your PAYE scheme will deduct Income Tax and Employee National Insurance from your wages. Your company will also pay employer National Insurance Contributions
How to Manage Your Taxes as a Sole Trader Freelancer
- Register for Self Assessment: The first step is to register for Self Assessment with HMRC. This allows you to report your income and expenses and pay any taxes due.
- Keep Accurate Records: Maintaining accurate records of your income and expenses isn’t just helpful—it’s essential. Accurate records ensure you claim all allowable expenses and correctly complete your tax return.
- Understand National Insurance: As a freelancer, you’ll need to pay Class 2 and possibly Class 4 National Insurance contributions, depending on your earnings.
When PAYE Does Apply?
There are certain situations where PAYE can come into play for freelancers:
- Part-Time Employment: If you have a part-time job in addition to freelancing, your employer will handle PAYE for your wages from that job.
- Freelancing through an Umbrella Company: Some freelancers work through an umbrella company, which acts as an employer and deducts PAYE taxes from their earnings.
- Director of a Limited Company: If you’re the director of your own limited company and pay yourself a salary, PAYE applies.
Employment Allowance
If you run your freelance business as a limited company and employ more than just yourself, you might be eligible for Employment Allowance, which can reduce your employer National Insurance bill by up to £5,000 per year.
It’s a valuable relief as it helps lower your overall tax burden – make sure you don’t miss out!
Check out our article and video on the subject for more details:
Understanding PAYE for Freelancers
While understanding PAYE isn’t typically a concern for freelancers who are fully self-employed, it’s essential to understand how it might affect you in specific situations.
Staying on top of your tax obligations is crucial to avoid unpleasant surprises. If you’re uncertain about how PAYE might apply to your freelance business, don’t hesitate to reach out to the IN Accountancy Team—we’re always here to help.
For more insights on managing your freelance finances, check out our guide to Self Assessment and In Accountancy’s blog for more expert advice – or take a look at our accountants for freelancers page for more information on how we can help 🙂
For more in depth reading on PAYE, check out the Government website guidance here:
https://www.gov.uk/paye-for-employers
💼 Ready to tackle your taxes? Let’s get started!
