As an accountancy firm which specialises in providing services for freelancers, we are often asked all sorts of questions by people who are thinking about freelancing for the first time. So we thought it might help to list some of them here – along with the answers of course!
How much can I earn as a freelancer?
If you freelance as a sole trader then your take home pay (after expenses) is essentially your profit, minus your tax and NI contributions.
|ANNUAL INCOME||Annual Take Home Pay||Monthly Take Home Pay|
*This assumes you will claim 20% of your income as expenses
As your tax is based on your profits after allowable expenses, you must make sure you are claiming for everything that you are entitled to and your accountant can advise you of this.
I want to try freelancing, but without giving up my day job straight away. Is that possible?
Yes, of course it is. Though we would always advise that you make your employer aware of what you are doing in case of any potential conflict. Providing your employer is OK with it, and you have no nasty clauses in your contract, then you will be fine. Indeed freelancing part time could even be an excellent way to start!
Do I have to register my business name with Companies House?
If you are operating your freelance business as a sole trader then no. As a sole trader you can choose pretty much any name you like, but once you register the name as a formal business entity there will be some restrictions – so even if you are only setting up as a sole trader now, you might want to register your name straight away, to protect it in the future if you do choose to go limited at a later date. Also, by registering your name you will make your details present at Companies House, which provides credibility and helps to build client confidence.
What do I do about National Insurance?
As soon as you decide to set up a freelance business, whether full or part time, you need to let HMRC know by completing the relevant form, and they will send you a quarterly bill for what is known as ‘Class 2’National Insurance. This is a basic payment which ensures that you pay enough to cover your future state pension requirements. All additional National Insurance payments (Class 4) are calculated by your accountant when your end of year figures are completed, and the amount owed is included in your tax bill.
If you have income from more than one job - e,g, if you are freelancing whilst still in permanent employment you should take care to ensure you are not paying more in NI contributions than you need to! If you think you may be exceeding the upper limit then you can apply for deferment of contributions.
Will I need a business bank account?
Technically no – but most people who set up a business of any type do generally choose to open a business bank account, to keep their business and personal finances separate. If you have never had one before, bear in mind that there may be charges for various things, like paying in cheques, so ask about these very carefully when choosing a bank. Some offer the first year free, but it’s worth shopping around to find the best long term banking partner.
Will I have to register for VAT?
No, not unless you hit the VAT threshold, which is currently £77,000 for the year commencing April 1st 2013. You must register for VAT when your turnover rises above the threshold in the previous 12 rolling months, or if you expect it to do so in the next 30 days. You have to start keeping records and charging VAT to your customers from the date of registration, which is usually the month after your annual turnover exceeded the threshold.
What are the advantages of being VAT registered?
Even if below the threshold, many people choose to register for VAT to give their business more ‘kudos’ with customers, or simply to make it appear larger than it really is – and this is entirely up to you.
If you do choose to register for VAT then there is the advantage of being able to claim the VAT back on everything you purchase for the business, but the ultimate benefit of this will depend on the type of business you have. If you buy things in and sell them on as part of your business function then it will be an advantage, but if you just charge for your services and only buy things like stationery which are required to run the business, it will be less beneficial.
What about the Flat Rate VAT scheme?
Another option to consider is the Flat Rate VAT scheme. As long as your turnover is less than £150,000 per annum, and depending on your business type, it is possible to gain financial benefits from registering for this. It provides a benefit because you charge at the standard rate (currently 20%) but you only pay at a lower rate. The difference is yours to keep, although you will be taxed on it as income. The Flat Rate scheme is also simpler to administer for you.
Take, for example, an IT freelancer who invoices £100,000 in a year:
- They will invoice in total £100,000 + £20,000 VAT = £120,000.
- However they only need to pay 10.5% of this total invoice (£120,000), so they will pay the government £12,600 in VAT.
- The £7,400 difference is theirs to keep!
The reason for this is that the Flat Rate scheme simplifies VAT administration for HMRC and so the financial benefit is passed on, to a point. The rate you pay will vary depending on your business type and when you register for VAT this will be assessed and agreed up front.
How do I make sure I put enough aside to pay my tax bill?
If you are operating as a limited company, then there are very specific limited company tax rules. However, if you are operating as a sole trader then it’s all rather more flexible. You will need to pay tax twice a year, on 31st January and 31st July via what is known as ‘payments on account’, and your accountant will be able to advise you on this.
At the end of the tax year (5th April) you will need to provide your accountant with a full set of income and expenditure figures. From these, they will be able to work out your tax liability and will tell you what your payments on account will be for the following year. You will still need to fill in a normal personal tax return and this is included in Easy Accountancy’s fully inclusive freelancer's £30 per month service. The time scales for completion of your tax return are the same as for an individual – but the sooner you do it after 5th April, the sooner you will have an exact tax liability figure for the following year.
As a general rule of thumb, if you put 30% of everything you earn to one side, this should cover you for tax and national insurance, but you will be able to adjust this over time as you get a feel for your likely tax bills. Don’t however make the mistake of not putting anything aside, as you will be in for a nasty shock when the bill comes in!
What can I include as ‘expenditure’?
Basically, anything which is a business cost is tax deductible. For example:
- IT equipment
- Premises rental
- Internet access
- Business phone bills
- Travel to customer premises - e.g. a train ticket
- Motor expenses - if you use your vehicle for both personal and business use then you simply reclaim VAT that relates to your business usage.
Do I need an accountant?
Using an accountant will ensure that you do not put yourself at risk to the various HMRC penalties and end up having to pay interest that is charged for late registration, late submission of tax returns and late payments of tax. Easy Accountancy offers freelancers who choose to operate as a sole trader an all-inclusive, fixed fee accountancy package of £30 plus VAT per month. This includes unlimited access to your very own accountant via telephone or email throughout the year, for help and advice.
For more advice on how Easy Accountancy can help you and business, or to find out more about our fixed fee packages, please call 0500 234 111 / 01442 275767 or email firstname.lastname@example.org.