Photo by Hannah Wei on Unsplash
Going freelance seems to be an increasingly attractive option these days. According to the Office for National Statistics 3.3 million people chose to be self-employed in 2001. This represents around 12% of the total UK workforce. By 2017 that number had increased to 4.8 million freelancers, representing over 15% of the workforce.
If you’re considering joining the ranks of the self-employed, now is a great time to do so. But before you take the leap, make sure that you’re fully up to speed with what’s required so you don’t face any unexpected—or unwelcome—surprises. We’ve put together some tips to help.
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It Takes Time to Start Making Money as a Freelancer
You can’t expect to set up as a freelancer and immediately have work rolling in unless you’re exceptionally fortunate. Most freelancers take several months at least to build up a consistent workload. Therefore, you need to make sure that you have sufficient funds in place to keep you going in the early stages.
Spend some time working out your monthly and yearly expenses, including mortgage payments or rent, utilities, childcare costs, bills, and food. But don’t forget to include those unexpected events too, such as vehicle and household repairs.
Consider Holidays and Sick Days
When you’re working for yourself, there are none of the benefits that you get from working for a company. So one of the most important things to consider is how you will manage if you’re too ill to work.
Also, what happens when you go on holiday? For the majority of freelancers, no work means no pay. Therefore, you need to make sure to have sufficient cash in reserve to tide you through any non-working periods of the year.
You’ll Need to Be Organized as a Freelancer
With no specific working hours and possibly no set office to work in, freelancers need masses of self-discipline. It’s down to you to organize your time effectively so you can be as productive as possible. If you struggle to motivate yourself, a career as a freelancer may not be the best option for you.
It’s helpful to set aside half a day a week, or a fortnight, to tackle administrative tasks, prepare invoices, reconcile bank statements, and generally keep things ticking over. This approach avoids a last-minute panic to get everything done, which can quickly lead to errors.
Understand Your Tax and Other Obligations
When you’re working for an company, your employer deducts taxes and other obligations from your salary. However, when you decide to go it alone, you’ll need to take care of these costs yourself. Alternatively, you’ll need to pay an accountant to take care of them on your behalf.
If you do it yourself, you’ll need to make sure that you’re fully up to speed with your financial obligations, such as meeting your tax deadlines. There are financial penalties if you fail to keep tax authorities fully updated with your business’s taxation requirements.
Your main options in deciding to become a freelancer are to become a sole trader or to set up your own limited company. The sole trader option means that there’s absolutely no distinction between you and your business, so if your business gets into financial difficulties, so do you. Forming a limited company removes any financial liability from you personally, so it often proves to be the better option, depending upon your business model.
Get Legal and Tax Advice Before Going Freelance
However, before setting up a limited company, you need to be very clear you’re staying on the right side of the law. Many self-employed workers who set up limited companies are skirting around the edges of the law.
In the UK, HMRC has taken steps to close up loopholes with its IR35 legislation which is explained in detail on the HMRC website. You can also check your employment status in the UK by using the gov.uk checking application.
This legislation prohibits freelancers from claiming to be self-employed when they are actually working for a company (“disguised employment”) but trying to avoid tax and National Insurance commitments. The IRS enforces similar restriction in the US.
Most governments impose severe penalties for anyone found to be breaching the regulations. Therefore, make sure you understand what the law entails before embarking on your new career.
Offshore workers tend to make use of limited companies to maximize their earnings, which can be substantial. However, the complexity of the taxation system makes the services of an experienced accountant a worthwhile investment.
Whether you’re working as an offshore contractor or running a small business from your home, you should make sure that you have appropriate insurance in place.
The type and level of insurance you’ll need is entirely dependent upon your industry and method of working. Check whether you could benefit from public liability insurance and professional indemnity cover. Moreover, don’t rely on your house and contents insurance. There’s a good chance that your work activity won’t be covered by a generic household policy.
You can also safeguard your business with professional indemnity to protect you in case your client encounters a financial loss due to your work. By knowing what insurance you’ll need as a freelancer, you can gain peace of mind and make a more informed insurance-buying decision.