The number of people working as full-time freelancers in the UK grew to 1.7 million in 2017, that’s over 5% of the working population. This comes as no surprise considering the flexibility it offers. Freelancers have a better work-life balance than their employed counterparts and are able to choose the jobs they want to do and the hours they work. According to the Taylor Review, the number of freelancers will increase as more ‘people look for work that suits their individual lifestyles and preferences’.
If you are interested in setting up as a freelancer, here are some helpful tips to think about as you plan your new venture.
1. Sole-trader or limited company?
When you become a freelancer you also become a business owner. In the UK, there are two main types of business: sole-trader and limited company. Each type has a different structure and this can affect things like tax and National Insurance or how financially liable you are as an individual. It is, therefore, very important that you make the right choice.
Sole-traders have the fewest financial obligations which means it’s a less burdensome business to run, however, there are fewer tax advantages and you run the risk of having to pay creditors out of your own pockets if the business cannot afford to pay.
Limited companies provide more protection against financial losses and also have distinct tax advantages, you can pay yourself dividends at lower tax rates, for example. However, they are legal entities in their own right and this means there are far more legal responsibilities that require the help of chartered accountants and the like.
If you are working with a partner, a third alternative is to set up a legal partnership.
2. Inform HMRC
When you start your freelance business, you are required to inform HMRC as soon as you intend to start trading. If you chose to operate as a sole-trader, you will be sent a Unique Tax Reference (UTR) number and will have to register for tax self-assessment and to pay National Insurance contributions. Freelancers pay 2 types of National Insurance depending upon profits – at the time of publication, Class 2 are paid if your profits are £6,205 or more a year and Class 4 are paid if they are over £8,424 a year.
If you become a director of a limited company, you become its employee and will need to operate PAYE, collecting tax and National Insurance every payday.
HMRC now enables many of the financial requirements placed on sole-traders and limited companies to be carried out online. You can even pay your tax via the HMRC gateway. However, many of these things, such as filling in self-assessment forms, can be challenging. Getting professional help ensures you pay the right amount of tax; no one wants to pay too much tax and paying too little can result in significant fines. If you have a limited company, an accountant is required to complete your annual accounts.
3. Get a business bank account
Whilst limited companies need a business account, sole-trading freelancers can use their personal accounts to pay in and pay out business transactions. Doing this may save you a few pounds a year in banking expenses, however, it can make it difficult when it comes to working out your business profit for your self-assessment. The best solution is to keep your business and personal finances completely separate.
4. Stay on top of the finances
One of the biggest causes of freelance business failure is lack of financial understanding and often this is the result of the freelancer not spending enough time keeping track of their accounts. As a freelancer you need to know every penny that comes in and goes out of your business and when transactions take place. Knowing this will help you get your pricing right, let you make informed decisions about purchasing and reduce the chance of cashflow problems arising.
Until recently, bookkeeping was a tedious and long-winded affair that meant filing and recording invoices and receipts and cross-referencing these with your bank statements and petty cash. Today, thankfully, much of this can be automated by using one of the many online apps, such as QuickBooks.
These apps, which can be used on your smartphone, create invoices, connect with your business account to show when you’ve been paid, and can even do the bookkeeping. You can also take photos of your receipts and upload them. This makes bookkeeping easy and ensures that you have a real-time overview of your business finances whenever you need it.
5. Get covered
Insurance cover is essential for any business and for several reasons. Firstly, you need cover to protect you in case of loss, damage or theft to your business property. If the tools of your trade get stolen, for example, you might not have the finances to replace them. Insurance prevents that scenario from arising.
Another essential is liability insurance. We live in a litigious society and if you inadvertently cause damage or injury, you may need to pay out or risk being sued. If you carry out work at a client’s home and accidentally burn the carpet, you could face a large claim. If someone is seriously injured or killed, you could be looking at multi-million pound lawsuit. Liability insurance will protect you in these instances.
Finally, you need to think of insuring yourself against sickness and business disruption. One of the downsides to self-employment is that there is no sick pay. If you are ill and cannot work, you won’t have an income until you are fit again. For this, you will need self-employed sickness cover. Other disruptions may affect your ability to trade too: roadworks outside your premises, fire or flooding. Business disruption insurance will ensure you get paid if these things prevent your business operating.
6. Put your business online
It doesn’t matter whether you’re a web developer with clients all over the world or a mobile hairdresser working within a small town: if you have a website, you will get more customers. Today, the internet is the consumer’s first port of call when looking for a product or service and if you don’t have a website, those consumers will find someone who does.
A website not only helps you get found, it also lets customers find out about the products and services you sell, what your prices are and how to get in touch. You can even use it to create a portfolio of your work and to provide testimonials from other happy customers.
Thankfully, with free software like WordPress, setting up a professional, feature-rich website is as easy as creating a Word document. There is no need for coding and if you choose a dedicated WordPress hosting package, all the software is preinstalled and ready to go.
Freelancing is fast becoming a lifestyle choice for those who want more control over the way they work. Setting up as a freelancer, however, involves the creation of a business and this means there are obligations you need to meet and best practices you need to follow.
Hopefully, the tips provided here will help you get to grips with these and set your business on a successful path.