What Are The Key Differences Between Employees And Freelancers For Tax Purposes?
You’ve just taken on a new assignment, maybe a short-term project or a freelance contract. One day you wake up, check your inbox, and realise you’re not just working, you’re now responsible for your own tax, payroll and compliance. That shift from employee to freelancer (or vice versa) can be a minefield for many.
At Carter Collins & Myer, we’ve helped hundreds of business owners, contractors and sole traders navigate these waters. If you’d like expert help, just call us on 01706 225 617 or email enquiries@uk-ccm.com.
Switching employment status changes much more than your desk and hours; at Carter Collins & Myer, we make sure your tax affairs reflect the reality, so you stay compliant and free to focus on your business.
Understanding The Basics: Employees Vs Freelancers
Before diving into tax, it’s important to define what separates an employee from a freelancer in the eyes of HMRC.
- Employees work under a contract of employment. Their employer controls their working hours, provides tools or equipment, and pays them through the PAYE (Pay As You Earn) system.
- Freelancers or self-employed individuals run their own business and provide services to clients. They are responsible for their own tax, National Insurance, and expenses.
While that may sound simple, HMRC sometimes investigates whether a person has been “disguised” as self-employed to avoid tax, which makes understanding these tax differences between employees and freelancers essential.
How Tax Works For Employees
If you’re an employee, your employer handles most of your tax responsibilities. Through the PAYE system, your Income Tax and National Insurance contributions (NICs) are automatically deducted from your salary before you’re paid.
Your employer also pays employer NICs on top of your wage. You’ll receive payslips showing how much tax you’ve paid and a P60 at the end of each tax year.
Employees typically don’t need to file a tax return unless they have additional income sources, such as rental property or freelance work on the side.
This system is convenient but offers less flexibility in how your income is managed or how expenses can be claimed.
How Tax Works For Freelancers
Freelancers, on the other hand, are considered self-employed and must handle their own tax affairs. This means:
- Registering with HMRC as self-employed.
- Completing an annual self-assessment tax return to report all income and expenses.
- Paying Income Tax and National Insurance directly to HMRC.
One advantage freelancers have is the ability to claim allowable business expenses, which can reduce taxable income. These include costs like equipment, travel, marketing, software, and even part of home office expenses if you work from home.
At Carter Collins & Myer, we support freelancers in staying compliant and maximising their take-home income through smart tax advice and compliance strategies.
Key Tax Differences Between Employees And Freelancers
Now that we’ve covered the basics, let’s break down the main tax differences employees and freelancers face in practice:
| Category | Employees | Freelancers |
| Tax System | PAYE (handled by employer) | Self-assessment (handled by individual) |
| National Insurance | Class 1 NICs deducted by the employer | Class 2 & Class 4 NICs paid directly |
| Tax-Free Allowance | £12,570 (2025/26 tax year) | Same, but applies after business expenses |
| Claiming Expenses | Limited (only certain work-related expenses) | Broad range of allowable business costs |
| Pension Contributions | Often through an employer scheme | Must arrange independently |
| Tax Deadlines | None – handled monthly | Must file by 31 January each year |
| Risk & Responsibility | Employer covers compliance | The individual is fully responsible for reporting |
These distinctions are crucial. For example, while employees enjoy stability and predictable deductions, freelancers have more control but greater responsibility for ensuring accuracy and timely payments.
Which Option Offers Better Tax Efficiency?
There’s no one-size-fits-all answer; it depends on your circumstances.
Employees benefit from convenience and employment rights such as paid holidays and sick leave. However, freelancers often enjoy greater flexibility in managing their finances and claiming expenses.
At Carter Collins & Myer, we help individuals understand which setup best suits their goals. Whether you’re considering leaving employment or already managing freelance income, our accountants can review your situation and guide you on how to stay compliant while maximising tax efficiency.
You can learn more about our personalised approach to compliance on our tax advice and compliance page.
Tax Planning Tips For Freelancers
To manage taxes effectively as a freelancer:
- Keep detailed records – Store invoices, receipts, and bank statements.
- Set aside money for tax – A good rule is to save around 25–30% of your income.
- Claim allowable expenses – This can include software subscriptions, travel, and workspace costs.
- Consider professional help – An accountant can ensure your self-assessment is accurate and submitted on time.
We’ve seen too many freelancers face penalties for late or incorrect filings. With professional guidance, these issues are easy to avoid.
When To Seek Expert Help
Whether you’re unsure about your employment status or juggling both PAYE and self-employed income, professional advice can make all the difference.
Our team at Carter Collins & Myer combines decades of experience helping individuals and businesses stay compliant while improving their financial position. From simple tax returns to complex multi-income cases, we provide clear, practical support, not confusing jargon.
Final Thoughts: Get Expert Guidance Today
Understanding the tax differences between employees and freelancers helps you stay compliant and make smarter financial choices. But navigating HMRC rules can be complicated, especially if you have multiple income streams or changing work arrangements.
That’s where we come in. At Carter Collins & Myer, we provide tailored tax advice to suit your situation. Whether you’re employed, self-employed, or somewhere in between, our goal is to make accounting simple and stress-free.
Call us today on 01706 225 617 or email enquiries@uk-ccm.com to book your free consultation.
Frequently Asked Questions
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Do freelancers pay more tax than employees?
Not necessarily. Freelancers can claim more expenses, which often reduces their taxable income. However, they are responsible for managing payments themselves.
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Can I be both employed and self-employed at the same time?
Yes. Many people work part-time as employees and freelance on the side. You’ll pay PAYE on your salary and file a self-assessment for your freelance income.
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What happens ifI’mclassed incorrectly by my client?
If HMRC finds you’ve been wrongly classed, you or your client may owe back taxes. Always clarify your employment status early to avoid issues.
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Do freelancers pay VAT?
Only if your turnover exceeds the VAT threshold (£90,000 as of 2025) can our tax team help assess whether VAT registration is right for you.
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How can an accountant help freelancers?
An accountant can manage tax returns, track expenses, and ensure full compliance, saving you both time and money.
