There is an increase in individuals falling prey to the taxman as a result of the increasing number of individuals turning to freelancing. An example comes from the BBC where over 100 employees working as freelancers could now be facing tax bills as a result of them not working as direct employees. HMRC may now argue that they should have been classed as permanent staff, and so have underpaid National Insurance Contributions (NICs). Therefore, if you are considering altering your position to freelance, it is imperative you are aware of the financial and legal obligations attached to the transition.
Costs
Although transitioning to self-employed status has its benefits, there are also drawbacks too. A self-employed individual cannot benefit from paid holiday, or sick leave. Further to this, if work cannot be found, or there are significant gaps between work, cash flow difficulties can occur. It is prudent therefore to have a cash reserve before self-employed status commences, or consider some form of income protection insurance to cover for illness.
Due to its protection of the individual, if a regular income cannot be earnt as a result of an illness, income protection insurance can be obtained to ensure the individual has confidence that an income will be earnt.
Sole trader or Limited status?
The status of your business will be largely based upon the size and nature of the business. The status of a sole trader comes with fewer regulations, and may be best suited to those with earnings below the VAT threshold of £85,000. However, being a limited company gives you limited liability, and therefore limits your losses to your company. A further drawback to self-employed status is the issuing of parental leave. Instead of benefiting from the standard maternity leave offered by normal employers, as a self-employed individual you can only receive a maternity allowance. This allowance stands at £140.98 a week for 39 weeks, and can only be received if the individual has paid NICs for at least 13 of the 66 weeks prior to the baby’s due date.
How will you pay?
The simplest option to pay taxes is to set up a separate savings account solely for taxes. This will allow you to move a certain percentage once you are paid, into an account. This can then be left untouched every month – so do not dip into those savings!
Once your tax account is set up, it is vital a decision is made on how income and expenses will be tracked in order to fill out a tax return. Utilising a cloud based product such as QuickBooks or Sage could be utilised for this, allowing you to list the work you have done, and how much you are being paid for it, as well as your business expenses – so make sure to keep your business receipts too!
Pensions
It is vital that those who are self-employed have considered what might happen in the future when they stop working. With over 45% of self-employed individuals aged 35-55 having no pension savings at all, it is clear planning a pension for retirement is imperative. If you are wanting to have a comfortable retirement, you may struggle if you are self-employed. Especially with just a state pension and personal savings for support.
An option could be to set up and make regular payments into a private pension. You will get the same immediate basic-rate tax relief as anyone in regular employment, plus if your earnings are more than £45,000, you will be able to claim the extra tax relief back through your tax return.
For more information on planning for a retirement, read our recent article Setting Goals for Retirement.
For further information on this article, contact Paul Windmill at paul.windmill@myersclark.co.uk or call him on 01923 224411. Or, if you would like further information on cloud based products, contact our cloud accounting experts, priyar@myersclark.co.uk or suzanne.daly@myersclark.co.uk.