How to set up as a freelancer?
Another important decision you will need to make if you want to start freelancing, beyond settling on your business idea and establishing a potential client, concerns your business structure, writes Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed.
Limited company vs sole trader
Do you want to work as a sole trader?
Or do you want to register as a company?
The sole trader structure can make things simpler overall – and involves lower accountancy and administration costs than a limited company.
However, over a certain profit level (accountants recommend somewhere between £30,000 and £50,000), a limited company to supply your freelance services through may be more secure and tax-efficient. You can find more resources to help you decide if a company is for you on the Companies House website.
Tax and finance
Whichever model you choose, you will need to register as self-employed with HMRC to ensure you pay the right taxes and, where appropriate, National Insurance.
Fortunately, you can find clear and extensive guidance on this on gov.uk.
Sole traders must register with HMRC by October 5th in their second tax year of trading. And you’ll have to submit your first tax return by January 31st in the following year. Thereafter, most sole traders pay tax twice a year, once on or before July 31st and once on or before January 31st.
As a sole trader, you will pay income tax on your profits as well as Class 2 and Class 4 National Insurance Contributions.
Separately, if you set up a limited company, you will be classed as an owner / director of your company.
You will need to register your private limited company with Companies House and pay corporation tax on your company’s profits. You can draw your income through a combination of salary and dividend payments, both of which are taxed.
If your tax looks taxing, don’t go it alone!
Before you get to this juncture, consider than an accountant can help you with book-keeping and the annual tax return. A good accountant can also make sure you claim all possible tax reliefs, allowances and businesses expenses.
Whether you form a limited company or remain as a sole trader, you must register for VAT if your turnover is over £85,000 (or you expect to exceed this amount).
But you can also register voluntarily for VAT if it suits your business. For example, if you sell to other VAT-registered businesses and want to reclaim the VAT.
Keep good records
As your own boss, it’s really important to make good records of your incomings and outgoings, what you need to put aside for tax, invoices and receipts for expenses.
Don’t forget about your tax-deductible expenses, which can include things like travel, office equipment and even a proportion of your utilities and rent, if you work from home.
Making Tax Digital is incoming; will you be ready?
New rules which will obligate all businesses to keep digital records are scheduled to be implemented in 2023. Making Tax Digital (MTD) will eventually incorporate all taxpayers and all taxes. For this, you will have to use MTD compliant software to keep records and report to HMRC.
Most of the software options do come at a cost but it isn’t prohibitively expensive. If you’re feeling proactive, or just want to be organised in running your self-employed business, it may be worth using this software now so that you are all ready for MTD once it affects you!
And finally, reach out…
For further details and information about structuring your business as a freelancer, consider asking a trusted, qualified accountant or reaching out to the IPSE Incubator to give your business the best possible start!