I recently received an email from a close friend of mine asking for advice on how to set up a freelance business. My friend had been working as a graphic designer for an agency and has decided to take the jump into full time freelancing.

Although an expert in design, the accounts and business side of going freelance wasn’t so clear to my friend. I often get messages from other designers and developers asking how I started my freelancing career, in particular the business setup; so I’ve decided to share my experiences via my reply to him.

Disclaimer: For any business decisions, my first recommendation is to talk to a professional accountant and/or business advisor. The following is from my experience as a freelance developer of 8 years. The majority of this applies to UK based freelancers.

1. Should I register as a limited business or sole trader?

Starting as a sole trader is easier, there’s not as much setup, but it’s far less safe than trading via a limited company.

Let’s say for some obscure reason (probably will never happen, but could), a client decides you’ve cost them money and wants to sue you. As a sole trader you’re personally responsible for any debts your business incurs. So in this extreme example, you could lose your house, car, etc.

As a limited company, your liability is limited (hence the name) – the debt is with the company, not with you personally. A limited company is legally separate from the individuals who run it.

Another reason many contractors register a limited company to trade through is there may be financial benefits. This is where your accountant would come in and work out exactly which route you’d be better off taking, based on your estimated yearly earnings, if you’re looking to work from home, average monthly business expenses and so on.

I started as a sole trader and registered as a limited company when it made financial sense. Knowing what I know now, I’d have gone limited straight away, but I’d consult an accountant and describe your specific circumstances.

Either way I’d be looking to use something FreeAgent to keep everything on track.

Further reading: https://www.gov.uk/set-up-sole-trader and https://www.gov.uk/limited-company-formation.

2. So you’ve already advised on FreeAgent, do I still need an accountant, and what for? I’m new the accounting side of things 

I’m sure people roll without an accountant, but alongside running your business it’s a lot extra to juggle. For me, what I pay my accountant is easily offset by the time it saves me. A good accountant will also advise you on business setup and structure that could save you money too.

A one man freelance business shouldn’t be a large job for an experienced accountancy practice, so I wouldn’t expect to be paying thousands. It makes their lives much easier too if you use something like FreeAgent as you’re essentially bookkeeping as you go along.

I’d get an accountant, even if you don’t specifically need one.

3. When you quote/bill clients, do you add VAT or is it inclusive in your date rate?

At the time of writing you only need to register for VAT if your business’ VAT’able annual turnover is over £85,000. You can also voluntarily register for VAT if your annual turnover is less than this; reasons being it can present you as a “bigger” firm to other businesses and there can also be financial benefits (again, consult an accountant).

Digital and design services aren’t VAT exempt, so if you think you’ll hit the threshold in a 12 month period VAT registration is compulsory. If you are not VAT registered, you should not charge VAT – either as a separate % on your quotes and invoices or included in your day rate.

Further reading: https://www.gov.uk/vat-registration/overview

4. How does it work with tax deduction. What kind of things should I be documenting or keep an eye on?

I know I keep saying it, but this is where you should talk to an accountant.

In short, if your business performs a transaction, in or out (sale or purchase), you need to record this. FreeAgent is awesome because when you raise an invoice there, that sale is recorded and when your bank feed pulls in, all your purchases are recorded (with descriptions of what that money out was for added by you).

Some businesses expenses are offset against your corporation tax payments. Even things like entertaining for business purposes are claimable – there’s an A-Z of what you can claim on here: https://www.gov.uk/expenses-and-benefits-a-to-z

As a rule of thumb for my freelancing business, my accountant told me to set aside 25-30% of every invoice that comes in (it’s varied slightly over the years). I wouldn’t use that figure as gospel for your own specific circumstances though! Get your budget worked out based on your estimated earnings.

5. Should I open a business bank account?

Yes, especially if you go down the limited company route.

Having all your business transactions completely separate from your personal ones prevents major bookkeeping headaches for you and your accountant.

Most banks will give you 2 years free service before they start charging too.

Finally, is there any key questions I’ve missed or things I should know? 

My main advice for freelance finance is to keep on top of your records. Don’t let it build up and become a harder job that it has to be. I’d definitely use FreeAgent as it keeps me in check and has done since I started my freelancing business.

Oh, and did I mention to get an accountant?!

Other than that, good luck!

Posted by Tom Hirst

Freelance WordPress developer, front-end developer and clothing line owner available for hire.

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