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Resources for freelancers working as sole traders

When you freelance, you have to decide what type of business you want to be. I opted for sole trader (the other common option is a limited company). This post is a quick collection of resources and services I've found useful, and issues to consider when setting up as freelance.

Warning: this post is not comprehensive. Its primary purpose is to be a collection of links I can refer back to. You should do more reading (and probably talk to an accountant) before making business decisions.

Consider . . .

  • Sole trader vs limited company. A limited company may give some protection from liability. A sole trader probably has simpler accounts, and may be less vulnerable to IR35 complications.
  • Type of accounting: I went for cash basis accounting, which means I only pay tax on money I've received. This is different to traditional accounting. Once you choose a method, you have to stick to it.
  • Should you register for VAT? The VAT threshold is £85,000 (as of 2021), but you may want to register even if you don't hit the threshold (I didn't).

Tips

  • You must keep records of all income and expenses (including evidence such as receipts). HMRC can ask to see this, and you'll be in trouble if you can't produce it. There are software tools to help with this (such as Quickbooks), but so far I've just used a spreadsheet and a folder in Google Drive.
  • You'll need to file a tax return every year. With good records, this doesn't have to be a big job. It gets more complex if you have multiple income sources (for example, if you have an investment portfolio, or income from property). At that point, you probably want an accountant.
  • Put aside 30% of every invoice into a savings account, so that you have the cash when the tax bill comes due. Adjust the percentage according to circumstances (the salary calculator can help you work out what you'll owe). Do this as soon as the payment comes in, and act like the money was never yours.
  • Watch out for gaps in your national insurance record. Sole traders usually pay class 4 national insurance, which doesn't count towards the qualifying years for your state pension. You can choose to pay voluntary class 2 national insurance as part of your annual tax return, and/or check your national insurance record and voluntarily make up gaps later.
  • Start a personal pension. Employees get a work pension, with payments taken from their salary, and the employer also making contributions. As a sole trader you don't have this. Even if you qualify for the state pension, it isn't available until 68 (and that may change before most of us reach retirement age), and it isn't a huge amount. You can probably get tax relief on a personal pension. If you want to freak yourself out, check out a pension calculator.
  • Be aware of the IR35 regulations. This is easier said than done, as the rules are clear as mud. IR35 is designed to prevent people being designated as contractors when they should be employees. The HMRC page I linked makes it sound like it doesn't affect sole traders ("The off-payroll working rules can apply if a worker (sometimes known as a contractor) provides their services through their own limited company or another type of intermediary to the client."). However, there is other legislation to cover sole traders - this article attempts to clarify things. And the tests for whether you're truly self-employed are rather vague, and can easily catch out tech contractors (especially if on a long term contract). Things are still in flux (as of 2021) with this legislation. If we're lucky, there will be adjustments to make the rules less clumsy. If we're not, employers may become more wary of hiring contractors (whether sole traders or limited companies).
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