Congratulations – you’ve taken the plunge and have taken control of your own destiny! Feels great doesn’t it – and a little scary, too? Panic ye not! Follow these 7 top tips on what to do in your first year as a freelancer and you’ll be taking great strides towards a successful and prolonged career.
OK – assumption time first, this blog is written predominantly for UK-based freelancers, but it has global resonance (just alter the advice to match the specifics of your locale).
1. Be smart with your tax savings. The first thing to note is that you should save for your tax bill from EVERY invoice. The most you’ll pay for UK Corporation Tax is currently 20% – so if you save 20% from each Invoice then by the time your accountant has deducted your costs then you will have a surplus at the end of the tax year. Maybe pay yourself a bonus or dividend to celebrate (oh, ok – I’m not qualified to offer any financial or tax advice; but this does make sense, right?).
Most Business Bank accounts will provide you with a Business Money Manager (BMM) sub-account that sits in the background – a place for your tax savings on which you will enjoy a derisory interest rate. So be smart. Why not do something like buying Premium Bonds to the value of what you’ve set aside? Premium bonds are instantly accessible (to cash-in on demand with no administrative fees) at any time.
From memory, every UK National is entitled to hold £50,000 worth of Premium Bonds (check with your accountant) without penalty – and you can even set it up so that any winnings are automatically exchanged into additional premium bonds. These extra Premium Bonds could even contribute towards a ‘pension pot’. Imagine if you won the monthly jackpot of £1,000,000…
Legal bit: Always take financial advice from your accountant, tax specialist, or financial adviser first to make sure you don’t incur any unnecessary tax liabilities (as Premium Bonds cannot be held by a company). But there are certainly smarter things to do with your tax savings then letting them fester in a BMM account.
2. Consider joining the VAT Flat Rate Scheme. This scheme was set up to simplify VAT (returns etc.) and to ‘encourage’ businesses under the mandatory threshold to register for VAT.
HMRC assess how much you charge in VAT from your invoices and calculate a fixed amount based on what a typical business like yours would claim back in VAT based on purchases you make. So what does this mean? Although you charge the VAT rate applicable at the time (currently 20%), you only pay HMRC a lesser amount (say 13% – the 7% difference being what they estimate you would claim back if you submitted actual receipts in a claim). Why not use the difference to contribute to your annual tax bill?
See legal bit above!
3. Save for a rainy day. The temptation in your first year will be to spend, spend, spend! Higher gross income with a reduced tax liability perhaps (for now anyway – as it’s not taken as PAYE). In your first year you should aim to amass a ‘nest egg’ in your business account that is roughly equivalent to 3-months income.
Why 3-months I hear you ask? Most clients have 30-day terms, and so if you submit monthly invoices, it could be 60-days before you get paid when starting another contract. The other 30-days? That’s to give you the freedom to wait for the right contract once you’ve finished your current one. Choosing the work that’s right for you and your brand is essential – the wrong ‘gig’ can have far-reaching and long-lasting impacts.
4. Don’t worry about how much you’re being paid for your first contract. When we set out freelancing we have an idea of what we are worth; yet often we accept a little less for the first one to ‘get ourselves started’. Don’t let this get you down – the hardest contract to get is your first; and you’ll never work for such a ‘low’ figure again.
5. Get acquainted with taxation and contract laws as soon as possible (especially IR35 if you are a contractor). IR35 was introduced originally to prevent consultants from leaving work as an employer one week and starting back as a contractor the next (with a much smaller tax liability).
As a minimum you should digest the government’s guidance on IR35 and consider joining an organisation that offers protection, insurance, advice and support against IR35 claims and investigation. Organisations like the FSB and IPSE offer this through membership (and as the membership fee is tax-deductible it may be a no-brainer!)
6. Keep on top of your accounts! Your accounts paperwork (even if its just to send to an accountant) must be done every week; along with tasks like logging mileage. Don’t kid yourself – you won’t remember everything if you don’t do this weekly. Be disciplined from the offset.
7. Engage early with an accountant and tax adviser (if they’re not one and the same). It’s vital to ensure you have the best mix of company type, pension arrangements (if you are drawing one), salary and dividend payments et al. Even if you have set your company up in a way that doesn’t offer the optimal match to your circumstances, your accountant will be able to rectify this with ease. Naturally the sooner you check, the better.
What top tips would you offer the freelancer embarking on their first year of trading? Share the benefits of your experience in the comments box below.
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