Employee to Freelancer Mid-Year: How to File in Sri Lanka

You handed in your notice in August. September was your first month working for yourself. The invoices are going out, the clients are paying, and somewhere around the second month it hits you: nobody is deducting tax from any of this anymore.

Then the harder question. What happens to the tax that was deducted, back when you had a payslip? Half a year of APIT went to the Inland Revenue Department under your name. Is that money gone?

It isn't. And the way Sri Lankan tax law handles a mid-year change of income type is more forgiving than most people expect, once you see how the pieces fit. This guide walks through what happens to your old APIT, why both halves of your year go on a single return, and the part almost nobody gets right: your first freelance-year quarterly payments are worked out from your old salary, not from your new freelance income.

What actually changes when you stop being an employee?

Exactly one thing changes, and everything else follows from it. Somebody used to pay your tax for you. Now you do.

While you were employed, your employer deducted APIT (Advance Personal Income Tax) from each month's salary and sent it to the IRD. You were outside the quarterly payment system entirely. IRD Circular SEC/2026/E/06 states this plainly: if your income comes solely from employment and that income is subject to APIT, you have no quarterly instalment obligation at all.

The moment you start earning business income, Section 90(1) of the Inland Revenue Act catches you. It applies to any person who "derives or expects to derive assessable income during a year of assessment" from a business, an investment, or other income. Freelance fees are business income. So you become an instalment payer, and the four quarterly dates become yours to manage.

What does not change is the tax itself. There is no separate freelancer tax rate and no separate employee tax rate. The same progressive bands apply to your total taxable income whichever way you earned it. For a resident individual:

And you get the Rs. 1,800,000 personal relief once for the year, not once per income type.

Is the APIT my old employer deducted gone?

No. This is the single most common worry and it's misplaced.

APIT is not a final tax. Section 83A(3) says the Act's withholding tax provisions apply to APIT as if every reference to withholding were a reference to APIT. That drops APIT straight into Section 89, which reads:

"(1) The withholdee of a payment that is not a final withholding payment shall be treated as having paid any tax withheld from the payment under this Division... (2) A withholdee shall be entitled to a tax credit in an amount equal to the tax treated as paid under subsection (1) for the year of assessment in which the payment is derived."

In plain terms: every rupee of APIT deducted from your salary is treated as tax you paid, and it comes off your final bill for that year. Leaving the job doesn't change that. The credit belongs to the year the salary was derived in, not to the employer.

Do I file two returns, one for each phase?

One return. Section 93(1) requires every person to file a return of income "not later than eight months after the end of each year of assessment", and Section 93(2) sets out what goes in it: your assessable income for the year "from each employment, business, investment and other income and the source of that income".

Read that list again. Employment and business sit side by side in a single return, by design. There is no concept of closing off one phase and opening another. The year of assessment runs April 1 to March 31 and it is one continuous period no matter how many ways you earned money inside it.

The same subsection then requires you to declare any tax paid "by withholding, instalment or assessment for which a tax credit is available under section 89 or 90", and then the amount remaining to be paid. That's the whole shape of your return:

1. Add up everything you earned, salary and freelance fees together
2. Subtract the Rs. 1,800,000 personal relief
3. Apply the progressive bands to get your gross tax
4. Subtract your APIT credit and any instalments you paid
5. Pay whatever is left

Two dates matter here, and they are not the same date. The balance of tax is due six months after year end under Section 82(2)(c), so September 30. The return is due eight months after year end, so November 30. The money is due two months before the paperwork.

When do my quarterly instalments start?

Under Section 90(2), instalments fall due on August 15, November 15 and February 15 within the year of assessment, and May 15 of the following one. Those dates are fixed. They don't shift to suit when you left your job.

What matters is when the obligation started, and that turns on expectation as much as receipt. If your move was unplanned in August and you only decided to freelance in September, the August 15 instalment was never yours to miss and you pick up from November 15. But if you had already resigned by mid-August and knew what was coming, Section 90(1) had you at August 15, because it catches income you expect to derive during the year.

What about the instalments you "skipped" before you started? The formula handles it automatically, which brings us to the interesting part.

How much is each instalment?

Section 90(3) sets the amount of each instalment as:

(A − C) / B

Here is where the law changed, and where most advice online is now out of date. Until the year of assessment beginning April 1, 2026, A was your own estimate of the year's tax, filed as a Statement of Estimated Tax under Section 91. The Inland Revenue (Amendment) Act, No. 11 of 2026 replaced that. For any year of assessment commencing on or after April 1, 2026, A is:

"the amount of tax payable by the instalment payer with respect to the taxable income under paragraph (a) of subsection (1) of section 2 in the immediately preceding year of assessment"

So A is last year's tax. For someone who was salaried all of last year, that means your quarterly instalments as a freelancer are calculated from the tax on your old salary. It feels backwards the first time you read it. It is also good news, because it's a known number rather than a guess about a business you only just started. Our guide on what replaced the Statement of Estimated Tax covers the change in full.

The other two elements:

• B is the number of instalments remaining for the year including the current one. So 4 at August 15, then 3, then 2, then 1.
• C is the tax already covered before that instalment falls due: earlier instalments you've paid, plus withholding credits.

C is where your APIT re-enters the story. Act No. 11 of 2026 inserted a new paragraph (ba) into element C, covering "tax withheld or to be withheld during the relevant year of assessment". Those three words do real work. The APIT your former employer deducted during this year of assessment, and any still to come before you leave, is subtracted before you pay a rupee of instalment.

What does a full changeover year look like?

Nadeesha earned Rs. 4,200,000 in salary through the whole of 2025/2026. She gave notice in July 2026, left on August 31, and started freelancing in September. Because she knew in July what was coming, she expected business income from the start of the year's instalment cycle, so all four instalments are hers.

Step 1: work out A from last year.

So A = Rs. 390,000.

Step 2: find her APIT for the current year. Her payslips for April to August 2026 show Rs. 150,000 of APIT deducted. Since she leaves at the end of August, that's the full amount that will be withheld this year.

Step 3: run the formula each quarter.

Four level payments of Rs. 60,000. Her APIT of Rs. 150,000 plus Rs. 240,000 of instalments comes to Rs. 390,000, exactly A. The formula self-levels, which is why a late start doesn't create a catch-up shock. It just divides what's left across fewer quarters.

Step 4: settle up at year end. Her freelance business turns out to have netted Rs. 2,850,000 between September and March.

Rs. 138,000 due September 30, 2027, return filed by November 30, 2027. Note what the instalments did: they covered Rs. 240,000 of a Rs. 528,000 bill because they were sized on a smaller prior year. The gap is normal in a year where your income grows, and it's the reason to keep money aside rather than assume the instalments have you covered.

Nadeesha's business income here is net profit, not what clients paid her. Deductible costs come off first, and the expenses freelancers can claim are broader than most first-year freelancers realise.

What if I expect to earn less freelancing than I did on salary?

Plenty of people take a pay cut in year one. The law anticipates it.

The proviso to the amended element A says that where an instalment payer "has no taxable income for the immediately preceding year of assessment, or expects to derive during the current year of assessment a taxable income lower than the taxable income of the immediately preceding year of assessment", the estimated tax for the current year is used as A instead, calculated on the basis specified by the Commissioner-General.

That's the escape hatch from paying instalments sized on a salary you no longer earn. It comes with paperwork. The IRD's circular requires a declaration on Attachment 1, with supporting calculations where you're claiming reduced income. The current IRD circular on 2026/2027 instalments sets out which version governs and when the attachments are due.

Two cautions. If you qualify for the standard basis, you can't opt into the alternative one because it looks cheaper. And an estimate you can't support is worse than no estimate, because the penalty for underpaying is mechanical.

What if my credits add up to more than my tax?

It happens more often than you'd think in a changeover year, especially if you left a well-paid job early in the year and your freelance income started slowly.

Section 150(1) covers it: where the tax you've paid exceeds the tax assessed, the excess is a refundable amount. Subsection (2) then says refundable amounts are paid to you. Before that, unless you object, the Commissioner-General may apply what's left against advance payments falling due in the next six months, and you can request a 60 percent set-off against subsequent income tax ahead of an audit of the claim.

What should you do this week?

Four things, in order.

1. Get the withholding certificate from your former employer for the current year of assessment. Everything downstream depends on that figure.
2. Find last year's tax payable, the gross figure before credits. That's your A. If you were fully employed, it's the tax on your salary, and your APIT guide explains how to read it off your records.
3. Work out which instalment dates are still ahead of you this year, and run (A − C) / B for the next one.
4. Decide whether you're on the standard basis or an alternative one. If you expect lower taxable income than last year, get the Attachment 1 declaration and your supporting numbers ready rather than quietly underpaying.

Changing how you earn doesn't reset your tax year, and it doesn't strand the tax you already paid. It moves the responsibility for the rest of the year onto you, on four fixed dates, with your old APIT already counted in your favour. Once you've seen the arithmetic once, it's the same four steps every quarter.