The Difference in Tax Processes for Freelancers and Employees
Tax processes in the UK are different for freelancers and employees. Understanding the differences between these two is essential, as they will affect the amount of tax you pay and the way you submit your tax returns.
This article will analyse the significant differences between the tax processes for freelancers and employees in the UK.
1. Taxable Income
Freelancers’ income is usually considered self-employed and subject to tax. Employees’ income is generally considered employment income and is subject to tax.
Freelancers in the UK are required to complete a self-assessment tax return, whereas employees in the UK do not. The self-assessment tax return is an annual form that must be completed and submitted to HMRC yearly.
3. Tax Rates
The tax rate for freelancers is calculated based on their total taxable income, while the tax rate for employees is based on their salary.
4. Tax Liability
Freelancers are liable for their taxable income, while employees are only liable for their salary.
5. Tax Deductions
Employees can generally only claim tax deductions for certain expenses related to their job. Freelancers, however, can claim tax deductions for a broader range of expenses, including office costs, travel expenses, and other business-related expenses.
6. National Insurance Contributions
Employees are compelled to pay National Insurance Contributions (NICs) each month, while freelancers only need to make NICs payments if they earn more than £6,475 a year.
Employees cannot claim any expenses against their income. Freelancers, however, can claim expenses against their income, such as expenses related to running their business, equipment and materials.
8. Tax Filing
Freelancers file their taxes on a self-assessment form. In contrast, employees file them through the PAYE system. A freelancer can always get accountancy services for any assistance in tax filing.
9. Tax Returns
Freelancers must submit quarterly tax returns, while employees must offer annual ones.
10. Tax Payments
Freelancers pay their taxes quarterly, while employees pay them through the PAYE system.
11. Self-employment Status
Employees are not considered self-employed, whereas freelancers are. This means that freelancers need to register as self-employed with HMRC.
12. Tax Deadlines
Freelancers and employees in the UK both have tax deadlines. Freelancers in the UK must submit their self-assessment tax return by 31st January each year, whereas employees in the UK have a different deadline for submitting their tax returns.
13. Tax Refunds
Freelancers and employees in the UK are both eligible for tax refunds. However, freelancers are more likely to receive a larger tax refund due to the additional expenses associated with being self-employed.
14. Tax Advice
Employees generally receive tax advice from their employer, while freelancers need to find their tax advice from an accountant or tax specialist. With accountancy services, freelancers can have an idea on how the taxation process works.
Freelancers and employees in the UK have different tax processes. It is essential to find out these differences to ensure that you are paying the right amount of taxes and filing your tax returns correctly. If you have any questions about the tax process for freelancers or employees, you should contact a qualified accountant.
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