Freelancers' Questions: How to set up as a freelancer?

Freelancer's Question: I am hoping to try my hand at a bit of freelance illustration and was planning to set up as a sole trader. I was wondering though, do I need to inform HM Revenue & Customs that I am a sole trader when I first start looking for work, or can it wait until I receive my first job? I am aware that I would need to start paying National Insurance as soon as I register but, also, do I need to register as self-employed before opening a business bank account?

Expert's Answer: If you are going to set up as a sole trader, you should register with HMRC as soon as your business is trading.

Will you be ‘trading’?

It can be quite difficult to decide whether or not you are, in fact, trading. To this end, HMRC list what they call "badges of trade" which you should use to decide if you are actually trading.

Register with HMRC

The latest you should register is by October 5th after the end of the first tax year for which you're going to need to file a tax return, which will be the tax year in which your business started. The tax year runs from April 6th one year to April 5th the next, so that means that if you started your business after April 5th this year; you've got till October 2013 to register with HMRC.

That said, if you incurred expenses for your business (such as buying business cards) before April 5th you can claim tax relief on those, so you might want to register by October 5th 2012.

National Insurance for the self-employed

As far as National Insurance goes, self-employed people (sole traders and partners) pay two kinds of National Insurance. Class 4 National Insurance is only payable once your business makes a profit, and Class 2 National Insurance, which I think is the kind you're thinking of, is payable at a flat rate of £2.65 per week, but if your profits are under £5,595 per year you can apply to HMRC to be exempt from paying class 2 National Insurance. Be careful if you do this, though, as if you're paying no National Insurance at all (i.e. you don't also have a full-time job), then your entitlement to State Pension could be affected.

Business bank account as a sole trader

A bank may or may not ask for proof that you've registered with HMRC before opening a bank account as a sole trader, but this is less clear-cut than if you're going to operate through a limited company, because as a sole trader you're not a separate legal entity from your business - legally you are the business.

Therefore you may be able to set your bank account up before you register. It is an excellent idea to keep a separate bank account for your business, to make sure you pay tax on only your business's income and don't forget any of its costs, so it’s very much worth continuing to look into opening a business bank account.

The expert was Emily Coltman ACA, chief accountant at FreeAgent, an online provider of accounting software to freelancers and one-person businesses.


7th August 2012

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