Setting up your business as a freelancer
Taking the leap and becoming a freelancer can be an exciting time. You’re able to pick and choose your own projects, set your workload and don’t have to report to the boss. But it also means you’re in charge of paying taxes, staying insured and bringing in new work.
What is the definition of a freelancer?
A freelancer is someone who works for themselves. By definition, they are self-employed and don’t have a boss who pays them a monthly wage. They’re responsible for running their own business, finding work and ultimately, making money. Being your own boss and getting to choose which projects you work on can sound like an attractive prospect, but there is plenty to consider before establishing yourself as a self-employed freelancer.
A freelancer can choose to operate as a:
- Sole trader - meaning they and their business are the same entity.
- Limited company - a freelancer will create a company, of which they will be an employee and the majority shareholder of.
Find out more about the differences between a sole trader and limited companies.
How do freelancers pay taxes?
As a freelancer, you must submit your own taxes via the government portal. Running your own business has many perks, but it does mean you’ll be responsible for paying your own taxes and National Insurance (NI).
When you work as an employee of a business, they’ll often sort your personal taxes for you as part of a monthly deduction from your wages. When you’re self-employed, this duty falls to you. This includes:
- Registering your company with HMRC via a self-assessment form.
- Registering your business for Value Added Tax (VAT).
- Working out how much tax you have to pay based on your taxable allowance and profits, information for which can be found at the HMRC website.
- Most freelancers pay what’s called a ‘payments on account’, a twice-yearly approximate payment of tax based on your overall profits.
- Work out what National Insurance band you are in based on your income and pay the required fee.
- Take away any taxable benefits for being self-employed, including travel, business expenses and staff salaries.
As a business owner, it’s vital that you submit and pay your taxes correctly each year or you could face hefty fines and legal ramifications. It’s also important to determine which of your engagements are subject to IR35.
You can find out more about calculating how much you owe the taxman and submitting your payments at the HMRC website.
How to start freelancing work?
Getting work for your business, and subsequently income, is down to you. Not having the guarantee of a regular income can seem daunting, but with the right approach you can be best placed to create a successful and profitable operation.
Knowing your market
It helps to know your market inside and out. Consider what works well in your industry and what doesn’t. You should look into what your competitors are doing successfully and not so successfully. You might also want to conduct some detailed research into what your customer needs are and consider how your business can provide for them.
Finding your niche
You need to make yourself stand out from the competition. Consider what it is you offer that sets you apart from rival businesses. Why are people going to buy your product or service? Whether you have particular skills or a unique product offering, it’s important that you find your particular niche.
Working out your costs
Next, you’ll need to factor in your business costs. You’ll need to consider travel, bills, insurance and equipment costs. Much of this may be upfront to get your business going, but you will need to work out how much you’ve spent and at what point you can break even.
Setting your fees (hourly or per project)
After you’ve factored in your expenditure, you’ll want to include a percentage of it as part of your fee. You need to make sure you’re making a profit, so your fee for work should include a percentage of your expenditure, tax, any payment for collaborators and some potential profit too.
Finding the work
You can find out about available work in a variety of ways, whether approaching potential clients directly with a proposal, or marketing yourself online in order to drive customers to you. As a freelancer, how much effort you put into finding work will have a direct impact on how much profit you make.
Your brand is everything, so make the most of it. Choose how to market your business based on your audience’s needs and location. Online, via a website or social media, can be a cost-effective way of marketing your business, or you could rely on approaching clients directly and pitching your offering to them.
Do I need to register as a freelancer?
It’s a legal requirement that you register as a freelancer if you plan on making money from your work. Whether you’re taking up the business full time or tackling the occasional passion project alongside your normal job, you will still be required to register with HMRC.
If you choose to register as a sole trader, you will be legally responsible for paying taxes based on the profits you make when you’re working. All your businesses finances are under your name, including debts.
Should you register as a limited company, business finances are under the business’ name. You should consider speaking a contractor accountant to ensure you pay all the relevant taxes for your business.
Will I need freelancer insurance?
Being your own boss can be very rewarding, but sometimes things can go wrong. Whether it’s a mistake that damages a client’s property, or an injury suffered by one of your employees, you can sometimes be left facing a hefty sum to cover the costs.
Having freelancer insurance can cover you in the event of a claim, meaning you can get on running a successful business knowing that you are financially covered should anything go wrong. You may even find that many clients insist that you are insured before signing off on any project.
Setting off into the wide world of self-employment can be an exciting time. While it’s wonderful to think that you’ll be doing something you love every day and not have a boss to report to, it’s still important to make sure you are acting within the rules and regulations. Correctly submitting your tax forms and making sure you are sufficiently insured can position your business for success in the future by leaving you free to work on the things you love.
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