Get organised for the new tax year – especially if you’re two types of freelancer
Last Updated on 5 April 2023
I get a lot of questions from people on my Finance of Freelancers courses about what happens to tax if you have a mix of PAYE income and sole trader income.
PAYE income and sole trader profits are both taxed using the income tax system, which is pretty straight forward.
But PAYE income is usually taxed by the time you get it, and sole trader income never is.
Sole traders (ie people who are registered as self-employed) fill in a self-assessment tax return at the end of the tax year to tell the tax people at HMRC their ’turnover’ (total of what they invoiced), and ‘business costs’ (total of spending on business-related expenses, equipment etc.). The tax office computer can then work out your profit, which is ‘turnover’ minus ‘costs’.
Keep your records separate
It’s important that you don’t mix up PAYE income and sole trader finances. A sole trader is a type of business, so things are taxed separately from PAYE work, where you are being taxed as an employee.
PAYE
I always encourage people to keep a payslip record as you go through the tax year. It just lists what you have been paid and what the deductions are. My version also has a column for the tax code so that you can ask questions of the employer or HMRC if you think something doesn’t look right.
You can download a payslip record template here >
It’s not compulsory to do this but It’s a good discipline. It forces you to check your payslips and spot anomalies, mistakes or confusion.
This is very helpful for PAYE freelancers who get a lot of short term jobs through the year.
Sole traders
Being a type of business there is more discipline required. By law you have to keep a record of business income (‘turnover’) and business costs.
There’s plenty of software around to help you to do this, but you can also use a free spreadsheet, at least until the tax office makes us go digital in a few years time.
The spreadsheet is called an ‘income and expense account’, and you can download my version here >
This sheet should only have sole trader stuff on it. Do not put PAYE income, as that’s dealt with separately by the tax office.
HMRC will already know all about your PAYE income, as the employer has to tell them every time you’re paid.
Timing is all
I’m writing this on 5th April 2023, and I have just completed everything for my personal self-assessment tax return, even though the tax office doesn’t need the information about 2022-23 until 31st Jan 2024.
This is not some Harry Potter-like magic. It’s just a question of keeping your records topped up as you go along through the tax year, starting on 6th April every year with a new sheet.
So download the record sheets, and do five minutes of topping up once a week. It’s always a Friday with me.
This means when you get to the end of the tax year next 5th April, everything will be waiting to be transferred to your tax return.
And if you have an accountant helping you, they will love you to bits, as well as charging you less.
Happy new year everyone!
Posted on 05 April 2023
I loved the dark humour in your happy new year post, and thanks for the easy explanation re two types of freelancer, which I increasingly am. I know I have to check my tax code, and I know from the Gov.uk website what the letters after the figures signify, but I still can’t work out if it looks right or not. Martin Lewis tells us all to check our tax codes, but as far as I as I can tell doesn’t say what we’re checking for. Is this something you could cover? I’d be happy to send you examples of my 3 tax codes if you like? Thanks, Kate (ex BBC staff, Freelance since 2017)