By Martin Hesketh
According to a study commissioned by the Professional Contractors Group (PCG), there are more than 1.4 million freelancers working in the UK — representing a 14 per cent growth over the past ten years.
Of those 1.4 million, 62 per cent are male and 38 per cent female and more than 160,000 have chosen to freelance in addition to their main job, proving becoming your own boss is an attractive prospect to many, especially given these uncertain economic times.
Being your own boss
Aside from the obvious benefits associated with working for yourself, such as flexibility and the ability to choose the projects you undertake, individuals could also find themselves earning more than if they were a permanent employee.
It also provides a suitable route to a certain type of worker who wants to set up in business but without the added responsibility of hiring employees.
Of course there are some downsides too, as freelancers and contractors don’t have the protection or benefits given to full-time employees. Also, self-employed professionals may find themselves working harder than ever before to secure continual work and have to quickly get to grips with complex tax legislation that affects them.
However the benefits, for many, can, outstrip the negatives and as UK businesses look to become more efficient and find leaner ways to operate, they are beginning to see the benefits of using a flexible workforce. Prime Minister, David Cameron, recently spoke out about the vital contribution the UK’s flexible workforce will make to economic recovery and his views will undoubtedly be reflected among owners of UK business. This will provide lucrative opportunities to the UK’s freelance and contractor community.
Becoming a contractor: First steps to going solo
Making the decision to go it alone and become a freelancer or start your own business is probably one of the biggest decisions anyone will make. One of the next things to consider is which business structure best suits you and your individual circumstances. You need to have the correct procedures in place to comply with current tax legislation to ensure you are paying the correct amount of tax given your chosen way of working, so it’s a good time to invest some time in choosing a specialist accountant.
A good contractor accountant will advise you on the best way of working for your situation and provide support on the decision making process, while still protecting your tax position and ensuring you optimise your take home pay.
Potential ways of working include running your own business either as a sole trader or limited company or working through an umbrella company.
Setting up as a sole trader
Becoming a sole trader is the simplest way to get your business off the ground. Sole traders don’t have to concern themselves with the administration and bureaucracy incurred by other start-ups. Unlike limited companies, they do not need to register with Companies House and can start trading immediately after registering with HMRC.
However, as a sole trader there is no distinction made between personal and business finances (unlike a limited company), resulting in you being ultimately liable should anything go wrong. You will also have to pay income tax and National Insurance Contributions (NICs) on your profits and register for VAT if your business turnover reaches the current threshold of £73,000 for the year.
Once you set up as a sole trader, it’s advisable to open a business bank account as it may be simpler for accountancy purposes. There is no legal requirement to set up a separate account but the majority of sole traders prefer to do so.
Forming a limited company
Opting to register as a director of a limited company is not a short-term solution and requires commitment from an individual as it will involve taking responsibility for book- keeping and credit control.
The director of a limited company is not responsible for any debts run up by the business and the company’s annual accounts must be filed at Companies House. Setting up a limited company is more of a complex process than setting yourself up as a sole trader but there are many advantages to working as a limited company — the main being the tax efficiencies that are available.
A good accountant will assist you with how much to pay yourself you will ensure you are working as tax efficiently as possible.
An umbrella company is an alternative to setting up a limited company or becoming a sole trader and will act as an employer to contractors and freelancers who work under a fixed term contract. It will raise invoices on your behalf and then a make payment to you once the funds have been received by the end-client or agency.
The umbrella company will also provide all PAYE and national insurance returns on your behalf. Through this type of structure you can also claim expenses that are chargeable to your agency or client and these will be refunded to you in full. Expenses that are not chargeable will be processed as a tax benefit — however these can’t be used to reduce your tax bill.
For individuals who don’t want the risk and responsibility of running their own business and only plan to freelance for a short period of time, working via an umbrella company can be a viable option despite it not offering the same tax opportunities as limited company or working as a sole trader.
Up and running
Once you’ve decided on the most appropriate business structure for you it’s important to stay on top of your finances and monitor the cash coming into your business.
Regular and accurate monthly management information of your accounts is vital to ensure your business is run effectively. Management information should tell you who owes you money, how much and when it is due for payment. You should also be aware of who your creditors are, when you need to pay them and if you have enough cash in the bank to cover the payment.
Regularly monitoring your cashflow is fundamental to running a successful business. Regular invoicing, negotiating longer payment terms with your suppliers and tight credit control are effective ways to ensure you don’t get caught out.
Avoid the pitfalls
To avoid unnecessary financial headaches it’s worth being aware of any tax liabilities and legislation and to put enough aside to avoid any surprise tax bills. A good accountant will advise you to look at your accounts on a monthly basis to help keep on top of your finances.
They should also advise you on any relevant, but often confusing, tax legislation such as IR35 which affects self-employed individuals working on a limited company basis and how to ensure you work compliantly.
Going it alone can be a daunting experience, especially given the current complex tax legislation effecting self-employed professionals but don’t let this put you off. There are huge financial and lifestyle benefits of becoming a freelancer or contractor and more and more professionals are choosing to opt for this route.
Please visit www.brookson.co.uk for more information on the company.
About The Author
Martin Hesketh is managing director of Brookson Accountancy and Support Services, providing accounting services for freelancers, contractors and self-employed professionals working in the creative, media, IT, healthcare and engineering sectors.