Making the Leap: Going Freelance
Going freelance can be tough, but if you approach it in the right way it can open up a whole new way of life.
Thinking of going freelance? You’re not alone. According to research from Kalido, around half the workforce will be freelance by 2020. It can be exciting, life affirming and challenging, but also stressful. You’re gaining freedom, flexibility and the chance to work on your own terms, but you’re losing, security and a dependable income. There’s no guarantee of success, but you can give yourself the best chance possible by asking these simple questions.
1. Is there a market?
Starting out as a freelancer is a lot like starting a new business, because that is exactly what you are doing. With any new business the first thing you need to do is research the market to see if there is an audience for your product or service. Freelance is no different. You may believe there’s an opportunity to sell your skills on the open market, but you need clear evidence telling you this is the case.
Once you’ve done that you need to find a niche. Can you identify an opportunity where enough people will buy your product, or service, to make the entire venture worthwhile?
2. What do you want your freelance career to look like?
Part of identifying a market is deciding what kind of freelancer you want to be. For example, is this a chance to simply earn yourself a living or are you hoping to grow it into something bigger – perhaps a business of your own? Once you’ve identified your final goal, you can decide what steps you need to take to achieve that goal.
3. What type of company will you be?
The next stage is to think about what structure you will choose to become freelance. There are several options.
Sole trader: This is possibly the simplest approach. You should register as self-employed with HMRC and arrange to make national insurance contributions. Every year, you will have to fill in a self-assessment form in which you declare your income and set this against your allowable expenses to calculate your final tax calculation.
Many sole traders prefer to manage their finances themselves, but some will choose to hire an accountant. This may add another layer of expense, but it could pay dividends when the time comes to pay tax. An accountant can make sure all your financial information is in order and that you have claimed for every expense and tax advantage you possibly can.
Umbrella company: Another approach for contractors, is to join an umbrella company. You will become an employee of an umbrella company but work with a client. You will invoice that client, but they will pay your umbrella company who will then pay you a salary. This is an opportunity to enjoy some of the flexibility of freelance while also retaining many of the protections of full-time employment. Many people see this as a chance to dip their toes in the water before making the full leap.
Limited company: If you’re managing to achieve a good level of turnover, it may be worth your while starting a limited company. You will have to register a company name with Companies House and fulfil certain reporting obligations such as filing regular accounts.
You will also be liable to corporation tax which is currently levied at 19% of corporate profits. However, this may change in one direction or the other depending on the attitude of the government of the time.
Working as a limited company comes with a range of administrative duties. You will have to register a company name with Companies House. You will have to manage this company in a responsible and solvent way and meet all HMRC deadlines. Every year you will have to file accounts.
Everywhere you turn, you’ll find a fresh set of administrative obligations you will have to meet. If you decide to expand and hire employees you will also have to manage their PAYE and fulfil your statutory requirements as an employer.
On the plus side, this is a highly tax-efficient way of managing your freelance career. When you establish as a limited company, you will have to name at least one person to be a shareholder and a director. If you’re working as a freelancer, you can fulfil both these roles. You may be able to name others as a shareholder and transfer part of your shares to a spouse if you want to.
You will then pay yourself a salary. In most cases, this will be a relatively low salary in order to keep yourself below the higher rate tax threshold. The rest of your money can come through share dividends which receive a much more favourable tax treatment than regular income tax. As long as you understand your rights and obligations, therefore, this could be an attractive option.
4. Plan ahead
Expect the unexpected. Life as a freelancer will be full of unexpected obstacles. What if your work starts to dry up? What happens if someone fails to pay on time and what if your expenses are higher than you think? These are the same kind of challenges which impact any small business owner and they are why many freelancers struggle.
5. Get help
Managing finances is a difficult balancing act and the more your freelance career takes off the more complicated it will become. Clients will grow, expenses will multiply and keeping everything in order will become more time-consuming.
The final step to successful freelancing, therefore, is to get help in the form of an accountant. They can help you to manage your finances more efficiently, meet all your HMRC obligations, avoid fines and ensure you’re only paying as much tax as you need to. As digital technology evolves, they are also becoming more accessible, as well as expanding the range of services they can offer.
Their ability to save you money, manage finances and help you avoid fines, means they quickly deliver a return on investment. They can guide you through every step – from deciding what structure to use, to setting up a limited company and managing your finances. They look after the details and manage all the necessary administrative tasks freeing you up to do what you do best, and keep your enterprise moving forward.