Working freelance is one of different ways to work for yourself. So what does it mean and what are your responsibilities as a freelancer?
Definition:
A freelancer is someone who works independently for different clients on a flexible basis, commonly as a self-employed person.
Freelancers can pick any number of clients, work hours and projects to suit their skills and schedule. They tend to work from home, but may rent a workspace or visit clients’ offices.
Being independent, they don’t usually share the same rights and contractual obligations as salaried employees on a payroll.
Rather than selling physical goods (although possible), freelancers tend to provide professional, skilled services. They are typically able to work remotely from a computer, but it really depends on the nature of the role.
Freelancer job examples
If working independently, they are registered as a sole trader on HMRC’s website. It is also possible to work as a freelancer for your own limited company, a limited liability partnership or through an umbrella company.
Being a sole trader is the best option for most, but for some with higher earnings and needs to limit liability risk, a limited company could be better.
How does it compare with contractors?
Just because you’re a sole trader or working for your own limited company, it doesn’t mean you’re a freelancer.
You can be classed as a contractor instead, which is when you provide professional services or skills to a business or organisation for a set period of time. The contract may be defined in terms of hours, months or time it takes to complete a defined project spec.
Contractors tend to work at their clients’ location for the duration of the project, as opposed to freelancers who rarely need to. They may find clients via recruitment agencies, companies with a team of contractors to call on, or directly through networking or marketing their own services.
Contractor jobs tend to require more commitment than freelancing, so they may involve working full-time for only one client for the duration of the project. It’s common to hire engineers, web or app developers, researchers, educators or any kind of consultant on a contractor basis.
Freelancers, in comparison, are able to balance multiple clients at the same time, because individual freelance jobs do not generally require full-time commitment.
Legal status as a freelancer
There are different ways to legally work as a freelancer in the UK.
One is to sign up as a Sole Trader on HMRC’s website. This gives you the status of an individual self-employed person responsible for your own taxes, losses and costs, and all the profits are yours to keep.
When signing up as a sole trader, you can choose a trading name, such as your own name or something that represents what you do as a business.
If working with others, you can register as a Limited Liability Partnership with at least one other freelancer or company. This also makes you self-employed, but with shared responsibilities over expenses, taxes and losses.
Profits are shared between all parties in such a partnership.
Some choose to register their own Limited Company at Companies House, where they are both the owner/Director and employee. This means you work for a business that is legally separate from you, even though you run it.
This is potentially more complicated than self-employment, because your company’s losses and finances in general are separate from your own, and it is still your responsibility as an owner to manage it all.
Companies can be “limited by shares”, meaning it has shares and shareholders and is allowed to keep profits after paying taxes. As a freelancer, you may be the sole shareholder and therefore own all shares.
They can also be “limited by guarantee” which is when the company has guarantors and a “guaranteed amount” and all profits are invested back in the company – freelancers don’t tend to go for this option.
Another way to freelance is as a contractor working for an umbrella company paying you like a regular employee via PAYE (Pay As You Earn).
The umbrella company manages taxes and payments from clients or agencies you do fixed-term jobs for.
You can freelance on the side in addition to working as an employee on a payroll, as long as you fulfil your tax obligations and register with HMRC where applicable.
Is it worth the extra effort to set up a company?
If you need to spend all the money you earn as you make it, it makes sense to be a sole trader. You only pay taxes on net profits once as a sole trader, so accounting is easier.
You just need to keep a record of all income and expenses, and estimate what taxes to put aside on a regular basis.
Sole traders are allowed to use their personal bank account as their business account, but a separate freelance account helps keep better track of income, expenses and taxes. You may even benefit from an account exclusively for tax money so you avoid spending it.
It’s a good idea to record all your figures in a spreadsheet or accounting software, and you should always keep records of invoices and receipts covering it all.
Sole trader responsibilities
Sole traders are personally responsible for all of the business’ losses (not really a problem for most people). You are also required to submit an annual tax return called self-assessment.
Sole trader checklist:
- Register as self-employed on HMRC’s website by 5th October in the second tax year of trading (otherwise, you may be fined). This gives you a Unique Taxpayer Reference (UTR), sent by post within 10 working days.
- Sign in to your digital tax account with the UTR and activate self-assessment.
- Record all income and expenses. HMRC lists allowable expenses on the website, such as work equipment and office rental.
- Every year by 31st January, submit a self-assessment containing details of income and expenses for the tax year ending the year before.
- Only if your annual turnover exceeds £85,000 should you register for VAT, allowing you to claim back VAT on your expenses (where VAT was paid).
When billing clients, it’s important to know what to include on the invoice, as there are legal requirements for that.
But many freelancers decide to register as a limited company because:
- You are not personally liable for your company’s losses.
- There are more tax benefits if you earn more.
- Some clients only hire limited companies.
- It looks more professional on paper.
Operating as a private company is, however, considerably more complicated from an accounting perspective, so you’ll most likely need an accountant.
The company’s address will be listed publicly, so if that’s your home address, this will be visible to everyone online. Accounts filed to Companies House will also be publicly available.
If you earn enough money to keep it invested somewhere else than your personal bank account, you may benefit from a limited company. Company profits are taxed separately, then the wages and dividends transferred to yourself are taxed too. These double-taxations can be a bad deal for a low income, but there are tax benefits by keeping profits in the company for enough time without paying them out to yourself.
Limited companies responsibilities
Checklist:
- Register your company with Companies House, appointing a director, shareholders and people with significant control (PSC) – this would all be you as the sole owner. The £12 registration is processed within 24 hours, giving you a company number followed by a Unique Taxpayer Reference (UTR) within 10 working days.
- Register PAYE through HMRC before your first payday, so you can pay yourself a wage.
- Register for Corporation Tax on GOV.UK’s website within 3 months of starting business activities.
- Submit an annual Confirmation Statement (£13) confirming all your business details are correct.
- Submit annual accounts (simplified) to Companies House.
- Submit an annual Corporation Tax Return (complicated) to HMRC.
- Submit an annual self-assessment to HMRC.
- Pay corporation tax by the due date.
- Keep detailed records of all finances, directors, shareholders, assets, etc.
You may have to submit other documents periodically such as quarterly VAT returns (if profits exceed £85,000 annually) and employer returns annually or monthly.
Limited companies must have a separate business account where all business payments are received and where expense transactions, wages and dividends can come from. From this account, you can pay yourself a combination of a salary and dividends. We recommend getting an accountant to advise on this, as otherwise it can get complicated.
If numbers and tax rules are not your strong side, sole trader status can be manageable enough to do it yourself (especially with few clients and expenses). Trying to get your head around the books for a limited company can end up costing more time (or money) than it’s worth, so you should definitely consider an accountant for that – if you’re earning enough to afford it.
Freelancing through a Limited Liability Partnership requires registering as that, and then submitting a self-assessment annually. Because it requires being at least two members, you must designate who is responsible for your shared accounts and submitting annual reports to Companies House as well. A solicitor can help you make an agreement on how profits are shared, among other things.
If you work for an umbrella company, you get taxed through PAYE and therefore don’t need to register for self-assessment. You essentially work for an employer that is not your business, and so are self-employed. You may sign an employment contract, in which case the company must comply with employment laws.
