So you’re ready to hand in your resignation and take the plunge as a freelancer? Then you’ll be joining over 5 million people in the UK who are already self-employed, with an annual 31% growth in the numbers joining them. So what’s so attractive about being your own boss? For some, it’s the freedom to work flexibly, for others the opportunities for career advancement and a bigger salary.
Whatever motivates you, our contractor’s guide to going freelance should help you through the important first decisions.
What do you want out of freelancing?
Being your own boss can seem attractive but are you being realistic about your prospects as a contractor? If you have the ability to be adaptable and flexible then you’ll also have the opportunity to build a killer CV that will earn you bigger and better contracts in the future.
Start with an audit of your financial outgoings, personal responsibilities and skills. Ask yourself the following questions:
- Do I need to leave my job or can I create a business on the side?
- Do I have the discipline to set goals and stick to them?
- Am I good at working alone?
- Can I afford to be self-employed?
- Do I have the networking skills and self-motivation to land those contracts?
Bear in mind that businesses often prefer to employ contractors because they’re more flexible than full-time staff; there’s no long-term commitment beyond the length of the contract; they have skills the permanent team can’t match.
If that sounds like you, you have a head start when it comes to making a success as a contractor.
Marketing yourself
Before you make the leap into freelancing, make sure that there’s a market for your skill set. Talk to the specialist agencies in your sector and other contractors to find out what’s available and the state of the current market. Then start optimising your skills and online profile:
- Arrange for any necessary retraining.
- Give your business a regular MOT including updating your profiles and CV.
- Make use of networking resources such as Contractor UK.
- Utilise personal contacts.
- Choose your agencies with care and develop business relationships with a key contact.
Sole trader, limited company or PSC?
Before you can register with HMRC as a freelancer, you’ll be required to make a decision as to how you want to set up in business.
Sole Trader
As a sole trader, you’ll be in charge of every element of your business and you can take all profits after tax and NIC. However, you’ll also be personally liable for all losses.
Limited Company
This operates as a separate legal entity and protects you against liability for any losses. They’re more tax efficient but come with more complex reporting requirements. Many freelancers choose to start out as sole traders before making the switch when they’ve found their feet with bookkeeping and legal requirements.
Umbrella Company
Also known as a personal service company [PSC], an umbrella company acts as an intermediary between a contractor and an end-client and deals with administration including payroll and taxes.
Making the right decision can impact the contracts you get and your tax efficiency.
How IR35 impacts on freelancing
Before you started thinking about freelancing, the chances are you’d never heard of the IR35 rules. Also known as the Off-Payroll rules, these rules help HMRC to determine whether you’re self-employed or actually a disguised employee. They currently apply only to the public sector but will apply to private sector contracts after April 2020. These rules only apply to contractors working through a PSC and small businesses (clients) are exempt.
There are three rules used to determine your self-employed status:
- Control: who is responsible for the way the job is completed, the contractor or the end-client?
- Mutuality of Obligation: can the contractor walk away from the contract at any time? Does the end-client have an obligation to offer more work?
- Personal Service: does the contractor personally have to finish the work as an employee would have to?
It’s worth getting to know HMRC’s CEST (Check Employment Status for Tax) IR35 tool. This will give you an insight into the way that your end-client is expected to determine your employment status under IR35 rules. Take steps to demonstrate that you are self-employed and make sure that any new contracts demonstrate that you fall outside the scope of IR35 rules.
There’s never a right time
Rather than waiting for the perfect moment to start freelancing, accept that there may never be a right time to strike out on your own. The trick is to create a moment that is good enough, so consider moving to part-time work with your current employer as you build your profile and contacts and wait for that first big contract to drop.
