Top Tips for Day 1 of Being Self Employed
More and more people are going self-employed, but if this is going to work out well you need to hit the ground running from day one.
Britain is fast becoming a nation of self-employed people. Indeed, by 2020 estimates suggest that around half of the total workforce will be freelancing. Whether doing so by choice to pursue the career of your dreams or because you’ve been forced into it by redundancy, you need to approach it in the right way and that means getting all your ducks in a row from day one.
Register for self-employment
As soon as you become self-employed, you’ll have tell HMRC so they know you will have to pay tax. How you register will depend on the way in which you intend to work. Sole traders must register as being self-employed and submit an annual tax return. Most freelancers will pay Class 2 NIC on profits over £6,205 per year at £2.95 per week and Class 4 NIC at 9% of all profits over£8,424. All profits over £46,350 will be taxed at 2%. As well as NICs, sole traders will pay income tax on their profits, which could be 0%, 20%, 40% or 45% depending on other income they you have.
If you decide to incorporate, you’ll have to register your company with Companies House, file annual accounts and pay corporation tax. To get started you’ll have to name someone as the main shareholder and at least one director, both of which could be you.
Things may become more complicated if you employ someone. You’ll be responsible for managing their PAYE and paying employers NIC. You’ll also have to take out employer’s liability insurance.
When working as a freelancer it’s a good idea to understand changes to IR35 rules. These were brought in to prevent disguised employment and can apply to people who are operating as a limited company to avoid national insurance contributions or splitting ownership with a partner. If you’re working as an employee the taxman will treat you as such which means you’ll be liable to NIC.
Self-employment is often a case of feast or famine. When times are good, you may be run off your feet, but without the security of a paycheque, you could struggle when business slows down.
Right from the outset, then, you should have a plan in place to start saving. In an ideal world you should have around six months’ worth of living costs set aside for emergencies.
You could save money in many ways, such as by saving a small amount each week to build up a buffer. You could also save a percentage of each invoice. For example, if you can save 30% of each invoice this should give you enough to account for taxes at the end of the year and build a healthy buffer.
Consider hiring an accountant
If you’re starting out as a freelancer, you’ll probably be inclined to handle all your accounts yourself. After all they should be relatively straightforward in the early days and you don’t want to waste money.
However, hiring an accountant could repay the investment quite quickly. First, every hour you don’t spend on your accounts is another hour you could spend providing your main service.
Remember: your most valuable asset is you, yourself. Freeing yourself up to concentrate on more important tasks ensures you get the most value from your own time possible.
Secondly, an accountant can help you to optimise your tax liabilities. Understanding what expenses you can claim back, and any other advantages could save you hundreds – even thousands – of pounds by the end of the tax year.
Planning ahead, both in the short and longer term, is vital from day one. You need to look at the year ahead and think about how your cash flow might vary. For example, do you have certain times in the year when you know you won’t be busy? If your work is seasonal you could experience prolonged fallow periods. Public holidays such as Christmas can also see work slow down considerably.
Because your income is not spread evenly across the year, you’ll need to make sure you build up enough in reserve during busy times to see you through quieter times.
Even at this stage, though, you shouldn’t be afraid to start thinking further down the line. Ask yourself this question: what will this business look like when it is finished? Every freelance career is a journey. Where that journey leads may differ from person to person.
Perhaps you just want to create an income for yourself doing a job you’re passionate about. In which case you may be happy to remain a sole trader for the foreseeable future. Alternatively, you may be thinking bigger. When Steve Jobs started Apple in his garage, he already had a vision of what this new enterprise might be in the future.
It might be a giant leap from a garage to the most valuable company in the world, but if you can visualise the end goal, you will then be able to put the building blocks in place to get there.
Day one of your freelancing career, then, could prove to be the most important. This your chance to create the foundations of a strong, stable and durable career which could continue to grow for many years. On the other hand, if you don’t put the legwork in now, you could find yourself struggling to keep up.