How much tax will I pay if I’m self employed?

tax options for self employed people

If you decide to become a freelance copywriter, then no matter what, you’ll be responsible for paying your own tax.

But this opens up a can of worms.

I mean, how do you pay tax when you’re your own boss?

How much tax will you have to pay?

And what happens if you’re taking on freelance copywriting jobs while you still have a permanent job?

So many questions…

If it all seems quite complicated and intense, then don’t worry - you’re not alone. Most freelance copywriters, when they first start out, aren’t aware of what they need to do in terms of paying tax.

Now, we would always advise any freelancers to use an accountant to handle all the financial tasks, simply because you’re going to be busy enough without any extra legal worries.

However, it won’t do any harm to have a quick lesson about paying tax as a freelance copywriter.

We spoke to ICS, who provide accountancy, administration and payroll services specifically to contractors and freelancers in the UK.

They’ve kindly given us the lowdown and helped create this post.

Some of the specific tax thresholds they’ve quoted will only apply to UK freelancers, but if you’re based in America, then there are still some nuggets here.

Basically, regardless of where you live, the amount of tax you pay when you’re self-employed will depend on 2 things:

1) How much you earn

2) How you choose to operate.

The first condition is obvious, but let’s look at the second: how you decide to operate as a self-employed freelancer.

There are 3 main ways of setting yourself up as a freelancer and each has advantages and disadvantages in terms of accountancy and tax.

Let’s take a closer look…

Method 1: Sole Trader

A sole trader is the exclusive owner of a business.

If you choose to operate as a sole trader, you’ll have to pay Class 2 NICs if your self-employment profits are above the Small Profits Threshold (£6,025 for the 2017/2018 tax year).

If your profits are above £8,164 for the 2017/2018 tax year, then you will have to pay Class 4 NICs.

If your income is above the standard Personal Allowance (£11,500 for the 2017/2018 tax year), then you’ll have to pay income tax – your income includes both self-employed profits and any earnings from employment.

Main advantages

You’re not taxed on any cash withdrawn from the business.

Also, it’s easy for you to borrow from the business bank account, as it’s your account.

Main disadvantages

You’ll have to do a self-assessment tax return.

It’s very unlikely that recruitment agencies will work with you if you’re operating as a sole trader.

Your sole trader business could only be used for copywriting assignments that you have sourced without a recruitment agency.

Plus, you’ll be personally responsible for any losses that your business makes, which could potentially result in bankruptcy.

Method 2: Umbrella solution

This route is often taken by anyone who uses agencies to source their assignments. It’s also a good option if you’re likely to return to permanent employment within a year.

With an umbrella solution you become an employee of the umbrella company, meaning that the income from your assignments will be deducted Class 1 NICs, income tax, and the apprentice levy cost.

Main advantages

You get full employment rights, such as holiday pay and statutory sick pay.

In addition, an umbrella solution has the least amount of administration as they process your payments for you.

Main disadvantages

It’s unlikely that you’ll be able to claim for expenses, although this will depend on your Supervision, Direction and Control (SDC) status.

An umbrella solution is unlikely to provide you with as much take home pay compared to operating via a Limited Company.

Method 3: Private Limited Company (or Limited Liability Company if you’re in the USA)

Setting up a limited company means you would become a director and shareholder of a business.

This option is often taken by freelancers who are on long-term assignments, whether they use a recruitment agency or not.

There are more things to be taxed on, including dividends, earnings and corporation tax on taxable profits.

But a limited company is more likely to maximise your take home pay due to certain tax allowances for the self-employed.

Main advantages

Being a director of a limited company can make you look more professional to potential clients. Also, some recruitment agencies only work with limited companies.

Your limited company will be legally separate from you, so the finances will be separate from your personal finances.

In effect, that means that if your company is made insolvent, then you’ll only be liable to the amount unpaid on your shares (if you have any).

Main disadvantages

There are more responsibilities as well as more administration involved compared to operating as a sole trader or using an umbrella solution.

Don’t forget that this included the self-assessment tax return. This is why many copywriters choose to outsource the accountancy side of their career to an accountant.

Please note: this article is just designed to give you a head start

Ultimately, there are advantages and disadvantages to all accountancy options, so we’d recommend talking to an accountant about your individual circumstances.

That way, you’re much more likely to get the solution that’s right for you. Nevertheless, at least you’re more informed now.

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