Key tax dates and deadlines for 2018/19
It is an inevitable reality that, for anyone earning a livin...
By Jonathan London on 12th November 2014
Taking the career step to become a freelancer is a very exhilarating and rewarding one. Not only do you have more flexibility and freedom to work the hours you want to, but you can really hone in on specific skills that you feel you are your strongest and enjoy the most.
However, with any career change there are always financial aspects which must be taken into consideration and the actual cost it takes to become a freelancer must be taken into account or there is a chance you that will fall at the first hurdle.
Obviously this only refers to the practical, financial aspects of freelancing as the rest is certainly more of a gain than a loss.
The chances are that you are going from a stable, salaried income to the world of freelancing and it must be taken into account that, especially at the beginning, work isn’t always guaranteed to be regular.
Therefore, the money you earn as a freelancer won’t be as stable as when you are employed by a business (although this is obviously subjective to the sector in which you work and the success in winning contracts).
While this isn’t necessarily an actual loss in finances, it is so, so important that you have enough savings behind you to cover any amount of rent, bills, medical bills and general living expenses for the next few months. Taking the journey to becoming a freelancer should be a happy time, not one filled with worry as to how the next rent will be paid. Here’s a list of the permie benefits you’ll need to plan for losing if you opt to go freelance.
If you have registered as a Sole Trader then once you begin earning you will be required by HM Revenue and Customs (HMRC) to pay Income Tax on the profits you make that are above the personal allowance, which currently stands at £10,000.
For this you will have to fill in an annual Self Assessment Tax Return form through HMRC.
National Insurance also has to be paid at Class 2, which amounts to £2.75 a week, unless you earn less than £5,885 a year.
The amount of tax you have to pay actually changes if you register as a Limited Company as you will be expected to pay Corporation Tax on your profits, which currently stands at 20 per cent for up to £300,000. This rate will then rise if you earn more. You will also have to pay Income Tax and National Insurance contributions similar to that of a Sole Trader.
If your Limited Company is VAT registered then you’ll need to pay VAT, as well as Tax on dividends if you go over the tax free threshold.
When setting up as a freelancer it is extremely important that you fully understand what it is that you will have to pay tax wise and ensure that you don’t inadvertently cause yourself expensive problems in the future. This is especially relevant when it comes to IR35 as this will affect your actual status if you don’t appear to match HMRC’s definition of self employed.
Most people who turn their hand to freelancing opt to make their office space at home (after all, this is cheaper than renting out a space elsewhere) and it is really important to make sure that your office is up to date and, for morale, clearly a place of work.
If you haven’t already, invest in a good desk and chair as the worst thing you could do is find it too uncomfortable on day one and find that the sofa in the lounge is suddenly appealing to you (note – procrastination does not make a successful freelancer).
You will also need a fully functioning printer/scanner/copier as you will be signing contracts and sending documents off to clients as well as archiving work and nothing screams unprofessional like not being able to do any basic admin work.
It is also imperative that you spend money on a decent computer, internet connection and software to go with it. An up to date smartphone and portable device such as a laptop or tablet is also a good idea for client meetings and being able to work on the go. All of these items can be reclaimed as a valid business expense – download our guide to expenses if you need more help in this area.
If you want to be taken seriously as a leader in your industry then you really should spend money in ensuring that you are advertised in the best way possible.
Spend money on getting a professional website set up so that potential clients can see what you’re about and contact you easily. It’s important to get yourself and the services you offer ‘out there’ and the more premium your website looks, the more likely that people will think of you as a leader.
It is also worth paying for an upgrade on LinkedIn so that you can search for projects easily and keep abreast of your industry. Check out this other guide for more advice on how to promote your limited company.
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