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.
Click on each type to view a different pathway to financial support during the current coronavirus crisis.
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
Sole Trader Freelancer
- Registered with HMRC as a ‘sole trader’
- Described by the government specifically as ‘self-employed’
- Typically invoices after the event, and waits for money, and waits, and waits…
- Keeps records of income and business-related expenses
- Has to submit a tax return at the end of each income tax year
- A type of business, so taxed on profit, not turnover
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 This is an out-of-date term that HMRC used to use for self-employed/sole traders.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.
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
- 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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