I keep answering questions on Forrst from people who are taking on some freelance work for the first time, or starting a business, so rather than keep writing the same responses there I thought I’d write up my suggestions here. This is obviously UK specific advice and I am not an accountant, I’m just someone who deals with this stuff myself. You should always get professional advice if you are unsure. The HMRC are also generally very helpful if you call with specific questions and can point you to the right information on their website.
I have agreed to build a website for someone – do I need to register as freelance?
Whether you are officially starting a business as your fulltime occupation or are taking on a few freelance projects in addition to your day job or studies, you need to tell the tax man (HMRC) that you are earning money on a self-employed basis. By doing this you let them know that you need to complete a tax return at the end of the year. You can register online on the HMRC website.
You will also become liable to pay Class 2 and Class 4 National Insurance contributions depending on the amount of profit you make in your business or freelance work. Class 2 contributions are currently charged at a flat rate of £2.50 per week which generally you will pay by direct debit. You will be liable to pay these from the time you register as self-employed unless your earnings fall below the lower limit and you have applied for small earnings exemption (see below). If you don’t set up a direct debit you will be sent a bill for these every 6 months. Class 4 contributions are based on your profits – so these are worked out as part of your tax return at the end of the financial year.
There is a useful guide to the basics available from Freelance Advisor.
I will only earn a small amount of money from this – should I still register?
You still need to register, however if you know that your earnings will be low you can register to be excepted from class 2 contributions. You must register, otherwise you will be billed for them. So if, for example, you know you are only going to take on a couple of freelance logo design jobs while you are a student you could safely register for the exception.
I’m a student do I need to pay tax?
Yes. If your income from all your employment and self-employment goes over your personal allowance. So if you have a summer or part time job, and do freelance work, all of this will be taken into account when you do your tax return. You will pay tax on the amount that goes over your personal allowance.
What records do I need to keep?
Keeping records is the most important thing you can do. If you have organised records then even if you struggle with your tax return someone will be able to help you out. You need to keep details of any money you earn through your freelance work – so if you send invoices this is easy. Just keep a copy of all invoices sent. You should also keep details of any money you spend that directly relates to the business. For example, if you buy fonts, stock photography, sub-contract some work to someone. This can all be deducted from the profit that you make on a job. You only pay tax and NI on profit, so you want to make sure that you are recording things that legitimately reduce your profit.
There are lots of online bookkeeping applications which make keeping records easy. I love Xero, and I also hear good things about Free Agent. You can do your invoicing, record expenses and keep tabs on profit and loss right from within these applications.
I would also suggest having a separate bank account for the business and transferring money as drawings to your own account. This just helps keep things simple and easy to reconcile.
What about VAT?
You don’t have to register for VAT until your sales (not profit) reaches £73,000 in a 12 month period. However you can register voluntarily. Once you are VAT registered you need to charge VAT on all of your invoices, and submit a VAT return detailing how much VAT you have collected – you then pay this amount. However before paying your VAT you deduct any VAT you have paid. This means that VAT makes your invoices more expensive, but this only matters if you are dealing with people who are not VAT registered.
So, if you provide services to businesses who are VAT registered, registering for VAT yourself will not make a lot of difference to them, and you can then claim back the VAT on anything you buy for your business. If you provide services to end users, who are not VAT registered then all your invoices are 20% more expensive once you have registered and they cannot claim this back.
Registering for VAT will also greatly increase the amount of admin you have to deal with – so you should factor this in to your decision to register voluntarily.
Do I need to register as a company? What is the difference between a limited company and just doing freelance work?
Once you have registered with HMRC as self-employed you become what is known as a sole trader. Some freelancers and small business incorporate as a Limited company. This makes a difference in terms of how your profits are taxed. You can make some savings on tax as a Limited company but it comes at a cost of more admin – and probably an accountants fee. Therefore generally, for a small amount of freelance income, you should stay as a sole trader as your tax is kept simple. If you are considering becoming a Limited company you will need to advice of an accountant to make sure that you are paying tax in the correct way.
Do I need an accountant?
If you are simply sending a few invoices and claiming some small expenses against those earnings then you should be able to complete your tax return yourself without the need for an accountant. Tax returns can now be completed online and HMRC will calculate how much tax you owe. So all you need to do is complete the form accurately from your records. This isn’t hard – the important thing is having all the records to hand.
An accountant becomes more useful if you are running a business as your fulltime job and have a large number of invoices and expenses to sort out – and especially if you are VAT registered, a Limited company, or employ people. An accountant will know what you may and may not claim against, and be able to let you know of any changing legislation that effects you and your business so is a worthwhile investment. I still do all the bookkeeping for edgeofmyseat.com however the accountant does our end of year return, making sure I’ve not done anything silly, and also lets me know if anything changes that I need to be aware of.
How do I pay my tax?
The deadline for filing your tax return is 31st of January. You can file it any time after the end of the tax year at the beginning of April, you will then know how much you need to pay. You need to pay this amount by the 31st January. So it is worthwhile doing your return as soon as possible as you then know how much you will need to pay. If you know that you are earning over your personal allowance you should put aside in a savings account enough money to pay your tax bill.
It is worth filing your return early as you may also be asked to make a payment on account – money towards the next years bill. This can come as a shock if you were not expecting it, so filing early will give you time to have the money available. If you are earning enough to be asked to make payments on account, you will make a payment on account on 31st January, then one 31st of July and the final payment the next January will make up the full amount of your bill – when you will also make a payment on account for the next year.
Registering as self employed and keeping accounts can seem a bit daunting however it really is quite straightforward once you know where to look. My top tips are to keep good records, put money aside for your bill, ask about anything you are not sure of and file your tax return as soon after the end of the tax year as possible. If you have any other tips please post them in the comments.