Comprehensive guide to working for yourself in the U.K.

Olympias Moran
Posted by Olympias Moran on Jul 8, 2019, 1:04:01 PM
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With good research, correct administration and a great business plan, you can lead a successful venture in the U.K. The U.K freelancing industry grew to 4.8 million self-employed workers in 2017 and continues to rise with more men, women and millennials taking on the challenge. 

 

Comprehensive guide to working for yourself in the U.K.

 

Freelancer Growth in the U.K

After the financial crisis in the U.K in 2008, working as a freelancer grew as an attractive option for many. It became evident that having an employment contract did not mean that your job was secure. Since the recession, more people have decided to take matters into their own hands. This created a huge increase in self-employment registrations and companies hiring freelancers on a project basis.

This new wave of working for yourself, researchers believe, has helped in reducing the unemployment rate in the U.K. to 3.8% as of April 2019, the lowest it has been since 1974 - according to the Office of National Statistics (ONS). In total, it’s estimated that the self-employed market contributes £275 billion to the UK economy.

Today’s technology enables both freelancers and companies to complete work with great results. Communication tools, time-management and project management - key ingredients to a successful task - are all available on a computer when connected to the Internet making remote working an alternative work/life balance for some. The ONS reports that the number of self-employed workers has increased from 3.3 million in 2001 to 4.8 million in 2017 accounting for 15% of the U.K workforce.

The largest number of self-employed workers overall are aged 45 to 54. But the most rapid increase has occurred in self-starters aged 65 and above, where numbers have grown from 159,000 to 469,000 between 2001 and 2016. A total of 181,000 16 to 24-year-olds were classified as self-employed workers in 2016 - up 74% from the 104,000 in 2001. This makes young people the second-fastest-growing group of self-employed workers, with part-time work accounting for most of the rise.

uk employment stats

 

Women Sole Traders

Female self-employment also grew over this period in both full-time and part-time scenarios. Female part-time self-employment increased from 439,000 to 812,000 between 2001 and 2016, while the number of female full-time self-employed workers increased from 433,000 to 732,000.

female employment statistics uk

Why is the Freelance Economy Growing?

More success stories are being shared and demystifying the notion of entrepreneurship. Turning an idea or your skills into a profitable business, even if it just provides one person with a living, is a realistic goal for many more people today. The rising profile of ‘entrepreneurs’ generally has helped people realise that they can be part of it. As discussions open about this shift in employment culture, reasons for the growth in the freelancer market include tax benefits, autonomy, skills, and the possibility to earn more.

  1. Tax Benefits
    • Freelancers in the U.K receive £12,500 as personal allowance annually which reduces the total amount of income to declare at the end of the tax year. Once freelancers earn over £125,000, the personal allowance stops. Self-employed individuals are also entitled to claim various costs as expenses. Working as a freelancer does not come with any extra benefits companies offer, such as sick leave, but when done correctly - freelancers who prefer to manage their own employment status can earn enough money.
  2. Autonomy
    • Many decide to become self-employed after working in a big organisation. They have a wealth of experience and knowledge to pass on to their clients. Freelancers in this scenario are confident that they can provide value to their paying clients while at the same time having autonomy. Peopleperhour.com ran a survey in which 67% of those surveyed said they freelanced for the freedom which includes working from home.
  3. Skills
    • According to a survey of the fast-growing businesses in the UK, a third of workers became self-employed because it suited their skills and abilities, while 18% just had an idea they wanted to try out. Freelancers do a number of different projects challenging their current skills and motivating them to learn more. The better their product or service, the more clients they will get and the more money they will make.
  4. Earnings
    • Some job positions have a salary cap. The company you work for may have no intention of increasing your annual wage if it isn’t part of their organisational plan or budget. It is also hard to move up if all the positions are filled and no future in sight. Being self-employed lifts this salary cap and opens opportunities. A freelancer’s income is directly related to their productivity. When working as a self-employed individual, you can make as little or as much income as you like.

Starting a Business

Starting your own venture is quite simple, yet it is important to do it correctly from the beginning. The process involves registering your company name through Company House, the Registrar of Companies in the UK, registering for self-assessment tax at the HMRC services and filing your income the next tax year.

Finding a good accountant is important and difficult. Make sure you get a specialist in self-employment as well as recommendations. You can also pay a small fee to another company to have the registration process taken care of. The company can also connect you to an accountant that handles these tax situations.

Having the correct information is crucial to ensuring that freelancers benefit from the tax claims offered to them. Sole traders and business owners need to provide their accountant with the correct paperwork so that all costs and the total income can be calculated correctly and then filed in the tax office. A third-party service that clients can benefit from is document automation. Freelancer management systems such as Flime automate paperwork including contracts, invoices and costs. The documents are stored and generated for clients to bring to their accountant in due time.

Which Type of Business?

Different business structures have varying benefits. Some include personal allowances and others have lower tax rates. The different types of businesses we will discuss in this article include sole trader, business partnership or a limited company.

The Gov.UK website provides information on the different conditions and rules for each as well as extra information on National Insurance Contributions (NIC) that needs to be paid by included in calculations and paid by every working resident in the country.

National Insurance Contributions

You pay National Insurance contributions to qualify for certain benefits and the State Pension. National Insurance must be paid if you’re 16 or over and either:

  • an employee earning above £166 a week
  • self-employed and making a profit of £6,365 or more a year

The NIC to pay by a self-employed individual will depend on their taxable profits.

  • The rates for a self-employed individual for the 2018/19 tax year are:

Class 2 - £2.95 per week where profits exceed £6,205 per annum

Class 4 – 9% of profits from £8,424 to £46,350 2% on profits above £46,350

You need a National Insurance number before you can start paying National Insurance contributions.

Sole Trader

Setting up as a sole trader is appealing to most starting out. It means that you are the only person involved in the business and run it on your own. The profits made from the business are yours and you are personally responsible for any legal risk or losses that can occur.

Taken from Gov.UK, you need to set up as a sole trader if:

  • you earned more than £1,000 from self-employment between 6 April 2018 and 5 April 2019
  • you need to prove you’re self-employed, for example, to claim Tax-Free Childcare
  • you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits

Sole trader responsibilities include:

  • keeping records of your business’s sales and expenses
  • sending a Self Assessment tax return every year
  • paying Income Tax on your profits and Class 2 and Class 4 National Insurance - use HMRC’s calculator to help you budget for this

You must also register for VAT if your turnover is over £85,000. You can trade under your own name, or you can choose another name for your business. You do not need to register your name. You must include your name and business name (if you have one) on official paperwork, for example, invoices and letters.

Sole trader names must not:

  • include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’
  • be offensive
  • be the same as an existing trademark

Business Partnership

In a partnership, you and your partner (or partners) personally share responsibility for your business. This includes:

  • any losses your business makes
  • bills for things you buy for your business, like stock or equipment

Business partnerships don’t pay tax. Partners share the business’s profits and pay tax on their share of partnership profits. Partners need to file a partnership tax return. This is the nominated partner’s job. Each partner files a self-assessment tax return and pays tax and National Insurance. A partner does not have to be an actual person. For example, a limited company counts as a ‘legal person’ and can also be a partner.

When you set up a business partnership you need to:

The ‘nominated partner’ is responsible for managing the partnership’s tax returns and keeping business records. There are different rules for limited partnerships and limited liability partnerships (LLPs).

Limited by shares

Unlike sole traders, limited companies don’t pay income tax and National Insurance. Instead, they pay corporation tax on their profits (income less allowable expenses). The current rate is 19 per cent. Limited by shares companies are usually businesses that make a profit. This means the company:

  • is legally separate from the people who run it
  • has separate finances from your personal ones
  • has shares and shareholders
  • can keep any profits it makes after paying tax

Limited by guarantee

Limited by guarantee companies are usually ‘not for profit’. This means the company:

  • is legally separate from the people who run it
  • has separate finances from your personal ones
  • has guarantors and a ‘guaranteed amount’
  • invests profits it makes back into the company

In order to select which type of business structure is best for you, clients can try to forecast the total revenue for one year and create a dummy, predictive income tax report. They can go through the different types of business set-ups and compare them to understand which set-up is the most financially and risk-free choice.

Create a Business Plan

Make sure to do comprehensive market research, create a marketing plan and create a forecast for your business finances so that you can aim for success. There are many sites that can help you create a business plan. When deciding what product or service to provide, it is good to remember that there is no special tax regime applicable to the freelancers involved in blogging, journalism, content creation in the U.K.

You need to be sure that you have a product or service to sell. Start by selling less than £1,000 and see if there is traction. Once you go over £1,000 limit, register as a sole trader. Once you see that your sales increase and your team expands, you can then decide which business structure suits your situation best.

Cost of Living in the U.K.

Self-employed persons in the U.K need to make sure that they can cover the bare necessities and must include these costs when forecasting their finances: accommodation, food and health insurance.

  • Whilst London is a great destination of choice, the living costs in the capital are significantly higher than in other parts of the country. London housing prices remain high and require a bigger budget. According to Numbeo’s 2019 figures, the average cost of renting in the city centre in the UK is £712 for a one-bedroom apartment. For three bedrooms in the city centre, the cost rises to £1,188, whilst outside the city is considerably cheaper at £923.
  • Public transportation in the UK is also more expensive than in other countries. On average, for a month, individuals pay £139 for a monthly bus/underground pass.
  • The weakened pound and higher import costs due to Brexit have resulted in prices of some foods rising dramatically. The UK has a string of supermarket chains which can be affordable if you shop in the right places.
  • Opting for Private Health Insurance can often get you treated and back to work faster than if you’d waited for the NHS. The UK’s growing army of self-employed workers – both sole traders and company directors – rarely get any sick pay and so can’t afford to be off work for long periods waiting for treatment on the NHS. Make sure that you have checked different plans that suit you best and add this to your general living costs.

Filing Your Tax Returns

Filing your taxes happens every year. It is important to file them correctly and in time to avoid extra costs. Freelancer management systems can help both companies and freelancers get ready for tax filing season by automating all important paperwork. Once gathered and downloaded, clients can send their invoices, contracts and reports to their accountant.

A resident domiciled in the UK is liable to pay UK tax on their worldwide income. An individual’s residency is determined using a statutory test and should be considered each tax year.

  • If the individual has been tax resident in the UK in one or more of the previous 3 tax years
  • The number of days present in the UK
  • The number of days spent overseas
  • The individual’s ties to the UK e.g. home, resident family etc. The individual’s specific circumstances would need to be considered against these questions

Self-Employed Income Taxes

The standard Personal Allowance is £12,500, which is the amount of income you do not have to pay tax on. Your Personal Allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance. The income rates for sole traders are as follows:

Income taxes for 2019/2020 UK

Limited Company Income Taxes

Any taxable profits arising in an accounting period will be subject to corporation tax. The current rate of corporation tax is 19%. For freelancers operating via personal service companies, they will typically extract money from their companies by way of dividends, which are taxed at lower rates than employment income. Dividends carry a £5,000 tax-free allowance and are taxed at 7.5%, 32.5% and 38.1% at the same thresholds as those set out above.

The personal tax year is 6 April to 5 April the following year. Individuals are required to file their self-assessment tax returns with HM Revenue and Customs (HMRC) by 31 January following the year-end.

You may also have tax-free allowances for:

Find out more on the Gov.UK website.

Income tax in Scotland

Income tax in Scotland works differently, with five rates of tax to pay, between 19 per cent and 46 per cent. The starter rate of 19 per cent is applicable to income between £12,500 and £14,549 (up from £11,850 to £13,850 the year before).

 

Income taxes for Scotland 2019/2020

Freelancer VAT Payments

A requirement to register for VAT usually exists when the value of taxable supplies made in the period of 12 months passes the UK VAT registration threshold (currently £85,000). A UK VAT registration number will be issued to the freelancer upon approval of the registration. The freelancer will be required to provide VAT invoices in the correct format for the services provided, and pay over any VAT due, if applicable to HMRC.

A UK VAT registered freelancer must account for and pay VAT by reference to VAT periods i.e. usually quarterly. HMRC currently allow one calendar month and seven days from the end of the VAT period to submit an online VAT return.

The VAT rate to be charged depends on the nature of the supplies being made and the place of supply. A VAT could, therefore, be charged at the standard rate (20%), reduced rate (5%), zero rates (0%), exempt or be outside the scope of VAT. For example, reduced rate VAT is charged on sanitary products, energy-saving measures and children’s car seats and is charged at 5%.

The zero rate is applied to most food, books, newspapers and children’s clothes. Although no VAT is charged, the sale of zero rate goods and services still has to be recorded and reported on your VAT return.

Only VAT registered businesses can issue VAT invoices, and they can be in paper or electronic form. The following information must be included on the invoice:

  • Unique invoice number that follows on from the last invoice
  • Business name and address
  • VAT number of freelancer
  • Date of issue of the document
  • The tax point (or time of supply)
  • Customer’s name or trading name and address
  • Description of the goods or services
  • Total amount excluding VAT
  • Total amount of VAT (expressed in sterling)
  • Price per item, excluding VAT
  • Quantity of each type of item
  • Rate of any discount per item
  • Rate of VAT charged per item – if an item is exempt or zero-rated make clear no VAT on these items
  • Total amount including VAT

Get the Job Done On Time

You must send your tax return by the deadline or you’ll get a penalty. It can seem like a daunting prospect, but with a bit of preparation and help from automated systems - you should be well on your way and have all the data ready for you or your accountant. You’ll receive a notice to file each year, and you can file your return at any point from then – there’s no necessity to leave it until the last minute. Most people file their Self Assessment tax return online. For this, you’ll need a Government Gateway login. Remember that this takes several days to arrive by post, so make sure you apply for one accordingly.

When you log in to file your return, you’ll need to answer a series of questions about the nature of your business, any other income you’ve received (including foreign income), and your expenses and income. You can choose to write expenses as a single figure, or if your accounts are more complicated, you can break them down.

A successful tax return relies on meticulous record-keeping throughout the tax year. You need to keep track of invoices, and receipts, and make sure that they’re properly filled in an expense report. If you aren’t sure about income tax or filing your tax return, it’s a good idea to get help from a qualified professional and to use a document management system.

Stay IR35 Compliant

With the growth of the gig economy, the HMRC enforced the IR35 rule in 1999. Essentially, IR35 affects all contractors who do not meet HMRC's definition of 'self-employment'. IR35 is tax legislation that is designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used.

According to Contractor Calculator: “Such workers are calleddisguised employees’ by Her Majesty’s Revenue and Customs (HMRC). If caught by IR35, they have to pay income tax and National Insurance Contributions (NICs) as if they were employed. The financial impact of IR35 is significant. It can reduce the worker’s net income by up to 25%, costing the typical limited company contractor thousands of pounds in additional income tax and NICs.”

If you are genuinely self-employed contractor, freelancer, interim or consultant, take the time to understand how the legislation works and apply best practices to ensure it does not apply to you. The first and most important point is to establish whether you are 'employed' or 'self-employed' under HMRC's terms. Seeking an advisor is always recommended in case of an audit.

Professional Landscape in the U.K.

There are opportunities for freelancers in the U.K. and in order to be successful, one needs to be digitally savvy as well as manage their time, projects and paperwork accordingly for a flawless workflow. It is important for self-employed people to choose their product or service correctly to ensure financial success. Instead of people working on tasks that can be automated, they can focus their attention on tasks that need their unique skills.

The Governor of the Bank of England recently predicted that nearly half of all roles could be automated in the coming decades. Accountants, fund managers, investment advisors, lawyers, medics and many more are among those whose roles will be affected. Citibank estimates that a quarter of Wall Street jobs will be computerised by 2020. This means continuing skills shortages that, according to the UK Commission for Employment and Skills, resulted in 22% of UK jobs going unfulfilled in 2015 needs to be filled.

With a marketable business, freelancers can enjoy the perks of self-employment in the U.K. Good use of technology enables freelancers to focus on their productivity. They can also automate documents, putting paperwork in the background, while they focus on their job. By saving time and money with a freelance management system such as Flime, all paperwork and files are in order - ready for your accountant during tax season. While the accountants are making sure that you are receiving the benefits you and your business are entitled to, you can plan for the future, work and watch your business grow in the U.K.

Topics: Freelancers, Taxation, Paperwork