This guest post is written by Athos Louca from Loucas the accountants for digital, new media and creative companies.
The digital industry is a thriving and vibrant place to work. Working freelance can be exciting, giving you the opportunity to work for different people and choosing how, when and where you work. If you are considering freelancing it’s vital to consider the legal status of how you will trade. You have three options basically – go self-employed, set up a limited company or join an umbrella company. We will explore them in detail with pros and cons below or you can take this summary:
In general, working as a self-employed individual is more suited to those with earnings up to, and around, £25,000 per year. It is free to register as self-employed and there is less administration than running a limited company, however it is important to consider that your liability to your creditors will be unlimited.
Trading through a limited company has the benefit of limited liability and allows more tax planning opportunities than self-employment, which could result in lower tax bills. This route is more suited to those with slightly higher earnings and those who are in it for the long run.
If you need to have a corporate structure but do not want to run your own company then an umbrella company may be the best vehicle for you provided you are happy about the costs.
Tax laws change all the time and everyone’s circumstances are different. Whilst this blog post will give an overview of the options available, you should seek professional advice from an accountant to ensure you use the best vehicle for you.
1. Self-employment (working for yourself)
Self-employment is ideal if you’re just starting out small scale, or if you only intend to work part time. To set up as self-employed is a very simple process, and can be achieved by completing some forms for HM Revenue and Customs within three months of starting to trade. As a self-employed individual you will need to keep a record of all business income and expenses including all receipts. You need to keep these records for a minimum of six years.
At the end of each financial year you will need to complete a personal tax return. This is a declaration of all income earned from all sources including profits from your freelance business. Your tax bill will be calculated based on this return. Your tax return must be submitted by the January following the end of the tax year. Tax is normally paid in two instalments each year, so it’s essential that you put by enough money to cover these liabilities. As someone who is self-employed you will pay income tax and class 2 and 4 national insurance.
An often overlooked, important, factor is that as a self-employed individual your liability to your creditors will be unlimited. This means that if you are unable to pay your bills and are henceforth taken to court, your personal assets, such as your home, may be at risk.
You can register as self employed on HM Revenue & Customs website
- Easy to set up as self-employed
- Little administration
- Lower annual running costs
- There is no limited liability protection so your personal assets are at risk
- Tax and National Insurance costs are higher than for a Limited Company
2. Limited company (being a company director)
This is an ideal vehicle if you are planning on running a larger setup with a number of customers. A company requires just one company director, which would normally be you.
It’s quick to setup a limited company and it can be done for a relatively low cost. Typical accountancy fees for forming a company will range for £200 to £300, although it is possible to do this yourself directly through a formation agent for around £50.
You will need to file statutory accounts and annual return each year with Companies House and file the accounts and a company Tax Return with HM Revenue and Customs. As a director you will also need to complete a personal tax return. You are likely to require the services of an accountant to help you with all of these requirements.
It’s essential that a company keeps good books and records, retaining all invoices and receipts and keeping all personal and business transactions separate from one another. A separate company bank account will need to be setup and it’s worth giving consideration to purchasing some accounting software such as Sage, Xero or QuickBooks to help with the bookkeeping.
A small company pays Corporation tax at 20%. This tax is due nine months after your financial year end. There are also favourable tax planning opportunities with a company to help reduce tax liabilities.
As a limited company you are offered a certain amount of protection by limited liability status. If the company falls on hard times and is unable to meet its debts as they fall due, it is only the company that’s liable to meet these debts and not you personally. The director’s liability is limited to the money he has put into the business.
If you decide to trade as a company, consideration should be given as to whether IR 35 legislation will apply.
- There are more tax planning opportunities with a company, often resulting in low taxes
- Your personal assets are protected
- A limited company is often seen as being more prestigious and business-like
- There is more administration when running a limited company
- Professional fees will be higher when running a limited company than when running a sole trader business
VAT is another consideration that applies equally whether you are self employed or trading as a company. VAT registration is optional until your annual turnover exceeds £77,000. If you become VAT registered you will have to charge VAT on all your sales invoices but you will be able to claim the VAT on your expenses. VAT returns have to be completed on a quarterly basis. There are various VAT schemes available for small businesses such as the flat rate scheme, annual accounting scheme and the cash accounting scheme. Professional advice should be sought when choosing a VAT scheme to ensure that the most advantageous scheme is applied to your business.
More information on VAT can be found on HM Revenue & Customs website
If you plan to get your work through an agency you will not be able to operate as self-employed. You will either have to operate your own limited company or join an umbrella company.
As an alternative to running your own company you could join an umbrella company. An umbrella company is similar to owning your own company, except you join one big company where the running and administration are managed for you. There are many umbrella companies to choose from. A useful list of umbrella companies can be found here.
- Easy to setup
- Less administration
- Ideal for short term contracts
- You will not be running your own business
- With the recent changes to the Tax legislation taxes will normally be higher than running your own company
- As your money will be passing through a third party there could be delays in receiving your funds
- Can be expensive
Athos heads up the digital, new media and creative sectors department at Loucas, who are a firm of Chartered Certified Accountants operating from a number of offices in the South East. Loucas have been working with businesses and individuals in these industries for many years. We understand the challenges faced and offer easy to follow, targeted advice.
For more information visit Loucas, Chartered Certified Accountants