What is a freelancer?
There are three types of freelancer. They are defined by the way they’re taxed and whether or not they are paid as employed or self-employed.
There is no technical definition of the word ‘freelance’.
Sometimes people are unsure which they are as the word freelance means different things to different people.
Even HMRC get confused. Especially HMRC.
PAYE or Payroll Freelancer
- Typically on short term contracts, or dailies/weeklies
- Paid through the payroll system of the employer
- PAYE system is used (PAYE = Pay As You Earn)
- National Insurance and (usually) income tax taken off by the employer using a tax code
- Receive a payslip whenever you’re paid. This shows you how much tax, NI, student loan repayment or pension contribution was taken off your pay by the employer.
You do not have to register with HMRC to be this kind of freelancer. You’re treated as employed for tax purposes, so the employer reports everything to HMRC.
Sole Trader Freelancer
- Registered with HMRC as a ‘sole trader’, once you’ve reached £1001 of total sole trader income in a tax year
- Described by the government specifically as ‘self-employed’
- Typically invoices after the event, and waits for money (and waits, and waits…)
- Usually paid with no deductions (unless in the construction industry scheme)
- Keeps records of income (“turnover”) and business-related expenses, and declares these figures on a tax form (ie: self-assessment “tax return”)
- Has to submit a tax return at the end of each income tax year, possibly using special HMRC-authorised ‘cloud accounting’ software
- A type of business, so taxed on profit (not turnover) which HMRC works out from your turnover and expenses figures. (Profit = annual turnover minus annual business-related costs)
Registration to do self-assessment as a sole trader is really simple. Have a look at the step-by step guide on gov.uk here:
https://www.gov.uk/become-sole-trader/register-sole-trader
You may hear people talk about schedule ‘D’. This is an out-of-date term that HMRC used to use for self-employed/sole traders. HMRC stopped using the term around 2012, but it still appears on paperwork used by some big organisations.
Schedule ‘D’ just means someone registered as a sole trader. A ‘schedule D number’ has been replaced by your UTR number (“Unique Taxpayer Reference” number), which you get when you register to be a sole trader.
Limited Company Freelancer
- The person and the business are two separate legal entities
- Typically used by freelancers who need to keep business assets separate from personal belongings
- Typically businesses with expensive equipment or risking their own finance in the work they do
- Take money out of the company via a mixture of salary and dividends (ie profits)
- For tax purposes the director (you) would be treated as ’employed’ by the company through a PAYE payroll for any salary element.
- Sometimes people use this model because clients say they don’t give work to sole traders. It distances them from any responsibility towards you as a worker.
- More complicated and lots of rules. Two tax returns: one for the company turnover/costs; the other for the director (you).
Don’t forget that you can freelance in more than one way. Some jobs may be PAYE, while others are allowed to be paid ‘gross’ (with nothing taken off) as a sole trader or through your limited company.
Image credit: Peggy und Marco Lachmann-Anke from Pixabay
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Although every effort has been made to provide accurate tips and information, David Thomas Media Ltd accepts no responsibility for any errors, omissions or out-of-date facts. Trainees are advised to seek up-to-date professional advice on all financial and tax matters before making decisions relating to these subjects. Nothing in our notes, courses, webinars, downloads or social media should be considered as financial advice.
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