Over the past decade, the nature of work in the UK has undergone a significant shift. People have started to look for a better compromise between work and other aspects of life, leading to an increase in flexible working. The expectation that most people would leave education, get a job, and then stay in that career for life, often with the same employer, became a thing of the past. Employers began to demand a highly flexible workforce and more and more shifted towards hiring freelancers rather than taking on more employees, outsourcing even tasks such as payroll and policy development, which had traditionally been done in house. This meant fewer people being employed in traditional ways and more and more starting to work as contractors.
There are now more than two million freelancers in the UK, making up around 6% of the total working population. Although most are in their 40s and 50s, marketing skills that they have gained in more traditional work environments, they also include a lot of young people – and no matter what age you start at, there’s a lot to learn about freelancing itself as well as the skills you have to offer. Most important to this – and to the Treasury, as it tries to adjust to the impact of these changes on the economy – is how you handle your finances.
However you choose to set up as a freelancer, you are obliged to keep track of your finances. You can do this directly as a sole trader, by setting up a company and employing yourself, or by working through an umbrella company. It’s your responsibility to make sure that your taxes are paid in full, along with any National Insurance. If you earn a very low amount in your first year or two of trading, then you may not strictly be obliged to pay National insurance, but it’s a good idea to do so on a voluntary basis because it affects your entitlement to certain benefits and may make a difference to what you have to live on if, for instance, you become seriously ill.
Sole trading or setting up a company
The simplest way to manage your finances as a freelancer is to work as a sole trader. This means that you can simply receive payment in your personal bank account. It will be your responsibility to keep clear records so that personal and business monies don’t get confused, and to file a self-assessment tax return with HMRC at the end of each year. As your earnings grow, however, this may cease to be the most financially advantageous option. Setting up a limited company and paying yourself as an employee gives you the option of registering losses and balancing out your actual income to keep you on the right side of tax thresholds as often as possible. Inevitably, it means more paperwork, and you will also need to have your accounts professionally audited. Whether you choose the sole trading or limited company option, you will have to deal with responsibilities that just aren’t an issue for traditional employees.
Using an umbrella company
Is there another way? Is an umbrella company the solution? Increasingly, freelancers are turning to such organisations so that there’s somebody else to look after the financial side of things while they concentrate on what they’re good at – and make sure that they generate good money in the first place. Working through an umbrella company is much like being an employee, in that your earnings are paid to the company each month (it doesn’t matter if they vary) and you receive a wage after tax and National insurance have been processed. There’s a small fee, of course, but you don’t have to worry about the paperwork, and you can be confident that if HMRC elects to audit your income at any time, you will have a good set of records.
Thinking of the future
It isn’t easy to live comfortably on a state pension these days, and if you are freelancing, then you won’t be making pension contributions through an employer. This makes it important to think about your future and consider setting up a private pension as early as possible. Some pension companies offer the option of making staggered payments to take into account the fact that your income will be lower in some months than others.
Whichever way you choose to go about it, getting your finances under control as a freelancer means that you will be free to focus on developing your career.