Many of our freelancer clients ask us ‘How much should I for tax’? Freelancers have many different individual circumstances, so to avoid this blog becoming like War & Peace, we have broken down a few simple scenarios for you.
In all cases, it’s best to speak to your accountant about your personal situation. If you don’t have an accountant, then do feel free to contact us.
How Much Should I Save For Taxes: Freelance Sole Trader
If you are a sole trader (not a limited company), a very good general rule to live by is that you put aside 25% of your profit for your tax.
For the majority of people, this works out really well and is sufficient to cover your tax bill.
If you have an awesome year and earn upwards of £50,000 profit, this will not be enough. It will give you a good ‘pot’ to help, however.
How Much Should I Save For Taxes: Freelance Limited Company Director
In the case of being a freelancer, we are going to assume you are a sole owner (shareholder) and director of the company for this example
You should leave 19% of your profits in your company to pay its corporation tax.
This is critical because if you get this wrong and don’t retain enough in the company, you can incur further tax problems, relating to what’s known as your ‘Directors Loan Account’ (there are a few videos we have done on this topic over on our YouTube Channel).
Cloud accounting applications like Xero and Quickbooks are great for keeping an up to date record of your profits, to help you calculate this.
Taking money out of the company personally as a dividend comes with a personal tax liability.
A good rule of thumb is to set aside around 10% of that dividend amount.
If you earn under £50,000 a year, this is likely to be much more than you actually need. The advantage of this additional saving, however, can help if you have to pay tax upfront twice a year (in what HMRC call ‘payments on account’).
These payments on account happen (generally) when you owe over £1000 of personal tax for the year.
The alternative to this method for the personal tax is that when you get into what feels like a regular dividend/earnings level, you can just aim to save roughly your ‘usual’ tax amount.
For example, if you know your tax bill is around £3000 a year when you take your ‘standard’ monthly amount, aiming for this can work well.
These are very loose guidelines but should put you in a good position to deal with any tax bill thrown at you at the year-end.
If you are a limited company owner, we would recommend working with an accountant that can update you during the year on your corporation tax bill, to make sure there is no way you have not left enough money in the company.
If you need any help with this, please do get in touch – our team would love a chat.