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A beginner's guide
Is your 9 to 5 job leaving you uninspired? Think it’s time to strike out on your own? Fancy the idea of being your own boss?
Whilst the world battled the COVID-19 pandemic many people stepped foot into the world of contracting or freelancing for the very first time, having started their own freelance passion projects on the side.
If you’ve harboured ideas of going self-employed yourself but currently have the security of an existing employment, you won’t want to jeopardise that. So, ensure that you check your employment contract or speak to your employer’s HR team to make sure you won’t be breaking any conditions or covenants of your employment.
Providing that what you’re proposing to do as a freelancer isn’t in competition with your employer’s business and isn’t going to reduce your work performance level, most employers won’t have a problem.
Many new businesses begin as part-time ventures, often borne out of the individual’s interests, hobbies and lifestyles. Starting a new enterprise in a small, controlled way helps to manage the risks inherent in business. If your part-time business grows to the point at which you feel that it can support you, then you’ll probably consider making it full-time.
Freelancing whilst employed - FAQs
If you feel ready to go, albeit in a small or limited fashion, what are some of the key things you’ll need to consider and do?
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Normally yes but you should check it’s OK with your employer before you do so, particularly if your freelance work is likely to be in competition with your employer’s business.
If you decide to set up your own business, either as a sole trader or through a limited company, you will need to let HMRC know.
If you want to start your business in a low-key way to see how it goes it’s probably best to operate as a sole trader. You can always incorporate your business at a later date.
Yes. If you choose to be either a sole trader or to carry on your business as a director of your own limited company, you will need to notify HMRC. Being a sole trader will bring you within the Self-Assessment tax system and you’ll need to file a Tax Return each year to report your trading profits.
If working through your limited company you’ll have a number of statutory filing obligations, in most cases it would be advisable to engage the services of an accountant to advise and help with your filing requirements.
This will depend upon the complexity of your business, but you will need to maintain at least a minimum of financial records detailing your business income and expenditure. You should also consider operating a business-only bank account if you are a sole trader to ensure your personal expenditure is kept separate. A limited company should have its own account.
There is a wide range of simple accounting software available or you could choose to engage an accountant from the outset who will help guide you as the business grows.
Any business with a taxable turnover (goods or services) in excess of £85,000 must be registered for VAT. Once registered the business will charge the appropriate VAT rate (normally 20%) on the supplies of goods or services it makes. It can claim the VAT it has incurred on its purchases against the VAT it has to pay over to HMRC. A business can also voluntarily register for VAT.
If you are still an employee, tax on your employment income will continue to be deducted under PAYE. Tax on your trading income will be based on the profit which you make and will be payable under the Self-Assessment tax system on 31 January each year.
The likelihood is that your tax-free Personal Allowance of £12,570 and some, if not all, of your basic rate (20%) tax band of up to £37,700 will have been used against your employment income so you may find that your trading profits could be charged at the higher rate of 40%.
The company will pay Corporation Tax on its business profits. If the director/shareholder takes a salary from the business and declares dividends from the net profits, then personal tax will be payable on that income.
If your freelance earnings are your only income for a tax year, you’ll start paying tax once those earnings go over your Personal Tax Allowance of £12,570 (2023/24 tax year).
For example, if your freelance earnings for the year are £25,000, you’ll pay tax on £12,430 (£25,000 less £12,570). Those net earnings would be charged at 20% resulting in a tax bill of £2,486.
However, if you already have a main employment, the likelihood is that your Personal Tax Allowance and some of your 20% rate tax band (up to £37,700), has already been used up against those earnings and you would pay tax on your freelance earnings or profits either at 20% or the higher rate of 40%.
Yes. For sole traders Class 2 Contributions of £3.45 per week are payable if business profits exceed £12,570. In addition, Class 4 Contributions of 9% are payable annually together with the income tax bill on profits between £12,570 and £50,270.
National Insurance Contributions are payable by a director or employee of a limited company on their salary or bonus. As an employer, the limited company may also have to pay employer’s NIC on those earnings. No NICs are payable on dividends.
Tax relief is available for expenses which are incurred wholly and exclusively for the purposes of the trade. This applies whether you are a sole trader or running your business through a limited company. Common expenses incurred like travel, telephone, IT costs, professional fees, marketing and advertising, office accommodation or the use of part of your home as an office are all likely to be allowable.
This will depend on whether your business is being run on a commercial basis and 'with a view to the realisation of profit'. So, if you have a hobby, say of making craft items and you sell a few of these on Facebook but generally it costs you money to keep going the 'loss' you make will not be allowable against your other taxable income.
This may not be a legal requirement for people operating in many industries, but it is prudent for a new or part-time freelancer to consider what risks they may be exposed to if things go wrong. Areas of insurance which deserve closer examination include professional indemnity, public liability and, if employees are involved, employers’ liability insurance.
A few other things to consider are things like the impact on home and car insurance if home-working and using a private for business are likely for the new venture. Advice should be taken from an accredited broker or authorised Financial Advisor.
How to set up a limited company?
Working through your own limited company is one of the most tax efficient ways to work. You will have the ability to dictate when, where and how you work. You’ll have the opportunity to build your own brand and will also be able to pitch for work that would be unavailable to asole traderor an umbrella contractor. In this guide, we'll talk you through how to set up your own limited company.
Read our guide
If you would like to speak to one of our experienced advisors to discuss anything mentioned on this page, please call us on 0161 923 0201 and press option 1.
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