Freelancer Tax & IR35 Guide: What You Need to Know

Understanding IR35

IR35 is tax legislation designed to identify contractors who work like employees but operate through their own limited company. If your contract is deemed inside IR35, you pay similar tax and NI to an employee.

Inside vs Outside IR35

Inside IR35: The end client (or agency for private sector) must deduct income tax and NI before paying you. Your take-home pay is significantly reduced.

Outside IR35: You invoice for your services and manage your own tax affairs. You can use dividend and salary strategies to be more tax-efficient.

Key factors determining status include: control over how you work, personal service obligation, mutuality of obligation, right of substitution, and financial risk.

Sole Trader vs Limited Company

Sole trader: Simpler setup and accounting. Pay income tax and Class 4 NI on profits. Best for lower earnings (under £30,000-40,000 profit).

Limited company: More tax-efficient at higher earnings through salary/dividend split. More admin and accounting costs (£1,000-2,000/year for an accountant). Corporation tax at 19-25% plus dividend tax is often lower than income tax plus NI.

Allowable Expenses

Common deductible expenses for freelancers: home office costs (simplified expenses: £6/week or actual costs), travel to client sites (not regular commuting if inside IR35), professional subscriptions and training, equipment and software, accounting fees, phone and broadband (business proportion), professional indemnity insurance.

Tax Deadlines

• Self-Assessment registration: By 5 October after your first year of freelancing
• Tax return deadline: 31 January (online) or 31 October (paper)
• Payment on account: 31 January and 31 July
• Corporation Tax: 9 months and 1 day after accounting period end