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Common Questions
Firstly, before you start to freelance, you'll need to determine what your tax status is: PAYE or self-employed. We always recommend that you consult an accountant for financial advice to determine this.
Your employment status will be influenced by how you decide you want to freelance, for example, whether you want to build up your own portfolio of clients (self-employed) or work on single longer-term contracts at the client's premises (employed).
Thinking about becoming self-employed?
You have two options - you can become either a sole trader or limited company. We recommend you seek financial advice before deciding what is best for you.
| PAYE | Sole Trader | Limited Company |
|---|---|---|
| Similar to employment | Self-employment | Employee of company |
| Have to submit P45 at beginning of each contract | Invoice client for fees and expenses | The company will invoice client for fees and expenses |
| Cannot offset expenses against your tax bill | Offset certain expenses against your tax bill | The company can offset certain business expenses against your tax bill |
| Income tax and NI deducted at source | Income tax and Class 4 NI paid in arrears by you / NI Class 2 paid by monthly direct debit | Income tax and NI deducted at source by the company Receive dividend payments out of profits Corporation tax payable nine months after the company's year end |
| Statutory employment benefits (eg SSP, SMP) | No employment benefits | You are a Director / employee and have statutory employment
benefits As a shareholder you will receive dividends |
| Paid holiday entitlement | No paid holiday entitlement | You will not receive additional pay for your holidays |
| No administration |
Self Assessment Need to keep accurate records of all receipts and expenses |
Corporate self-assessment Company PAYE scheme The company will need to keep accurate business records of all transactions (receipts and expenses) and assets and liabilities |
If you're going to register as a sole-trader, you'll need to:
- Tell your local Tax Office, the Inland Revenue, National Insurance Contributions Office and Customs and Excise that you are in business. This can be done in one go by filling in the form CWF1, which also registers you for Class 2 (self-employed) National Insurance contributions and tax. This can be paid easily by a monthly direct debit using form CA5601. You will also have to pay Class 4 National Insurance contributions which are based on percentage of annual profits and these are due in arrears with your income tax
- To register for VAT (if your total sales are over £61,000 in a 12 month period) you will need to complete a VAT1 form obtainable from your local tax office
- Set up a book-keeping system and keep an accurate record of all receipts and expenses, keeping all back-up records like invoices, receipts, bank statements, cheque stubs and paying in slips
If you're going to be a shareholder in a limited company, you'll need to:
- Talk to your accountant, or contact a specialist formation agent
- Form a new limited company or purchase a company "off the shelf". This is fairly straightforward and involves the completion of a few forms to appoint a director and company secretary, to state the company's registered office and financial year end
- To register for VAT (if your total sales are over £61,000 in a 12 month period), the company will need to complete a VAT1 form obtainable from its local tax office
- The company will need to set up a book-keeping system and keep an accurate record of all receipts and expenses, keeping all back-up records like invoices, receipts, bank statements, cheque stubs and paying in slips
- The company's business bank account and your own personal bank account and expenses should be kept separate. Keep all records for six years
You'll need to consider that freelancing doesn't always give you a regular income - and if you're self-employed, you won't generally get any paid holiday. So it's worth saving some funds before you take the plunge.
One of the biggest problems for many freelance consultants can be the need to chase payment. Of course we're always happy to offer advice - and if it's a company we placed you with - will always help.
For information on tax and national insurance matters visit the Inland Revenue website.
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