How to move from employment to freelancing
Starting a freelance career marks a significant transition from traditional employment but it’s a decision that many are nervous to make.
Freelancing, while offering greater flexibility and autonomy, comes with its own set of challenges, decisions, and an increased responsibility for your finances.
Understanding your options: Sole trader vs limited company
The choice between operating as a sole trader or setting up a limited company when deciding to freelance is pivotal in your professional career development.
The choice will influence your tax obligations, legal liabilities, and administrative duties.
Understanding the nuances of each option is crucial for making an informed decision that aligns with your professional goals and personal circumstances.
Here are some of the pros and cons of each choice:
Sole trading
Pros:
- Ease of setup: One of the most appealing aspects of being a sole trader is the straightforward setup process. You simply need to register with HM Revenue & Customs (HMRC), and you can start trading almost immediately.
- Autonomy: As a sole trader, you have complete control over your business decisions. This autonomy means you can directly manage your finances, choose your work, and make decisions that best suit your personal and professional goals.
- Simplified finances: The financial management and tax reporting requirements for sole traders are less complex than those for limited companies. You are required to keep records of your income and expenses and complete an annual Self-Assessment tax return.
Cons:
- Unlimited liability: The major downside of being a sole trader is the unlimited liability. If your business encounters financial trouble, your personal assets, such as your home or car, could be at risk. This risk is something to seriously consider, especially if your freelance work involves significant financial transactions or liabilities.
- Tax efficiency: As your income as a sole trader grows, you may find yourself moving into a higher tax bracket. This situation can lead to a higher tax liability compared to operating under a limited company, where there are more opportunities for tax planning and potentially lower rates of Corporation Tax.
Limited companies
Pros:
- Limited liability: The most significant advantage of a limited company is the protection of personal assets. As a separate legal entity, the company’s financial liabilities are separate from your personal finances. This protection provides peace of mind, especially in industries where there is a higher risk of legal disputes or financial liabilities.
- Tax advantages: Operating through a limited company can be more tax-efficient, particularly for higher earners. The Corporation Tax rate is generally lower than the higher personal Income Tax rates. Additionally, drawing income as dividends can be more tax-efficient than a salary, providing opportunities for strategic tax planning.
- Corporate image: A limited company often presents a more professional image, which can be beneficial in attracting clients, especially larger corporate clients. This perception can lead to more business opportunities and potentially higher rates of pay.
Cons:
- Complex setup: Setting up a limited company involves more steps than becoming a sole trader. You need to register with Companies House, which includes choosing a company name, preparing documents like the memorandum and articles of association, and understanding the legal responsibilities of being a company director.
- Increased administration: Running a limited company comes with more administrative responsibilities. You are required to file annual accounts, a confirmation statement, and deal with corporate tax affairs. This increased paperwork can be time-consuming and may require the assistance of an accountant.
- Public disclosure: A limited company must disclose certain information to the public. Details such as director names, registered office address, and annual accounts are accessible through Companies House. This lack of privacy can be a drawback for those who prefer to keep their business details confidential.
Tax considerations
Navigating taxation effectively is also a critical aspect of freelancing.
As a sole trader, you’ll complete a Self-Assessment tax return annually, paying Income Tax and National Insurance on your profits.
A limited company pays Corporation Tax on profits, and any salary or dividends you take are subject to personal tax.
VAT registration is mandatory if your turnover exceeds £85,000 for either option.
However, registering voluntarily before that threshold can have advantages, such as reclaiming VAT on business expenses.
Understanding the tax liabilities of each option is a complex web of regulation and is therefore best discussed with a qualified accountant.
Keeping records and accounting
Effective record-keeping is vital for either a sole trader or a limited company.
As a freelancer, you must track all business transactions and commit to firm and robust accounting practices.
This is especially important for limited companies due to more stringent reporting requirements.
While some prefer manual record-keeping, many opt for an outsourced accounting professional to organise it for them.
Which one is right for you?
This choice between becoming a sole trader or establishing a limited company is more than just a legal or financial consideration.
In making this decision, consider not only the immediate benefits and challenges but also how each option fits into your long-term vision.
Are you seeking the simplicity and direct control of a sole trader, or do you envisage a business structure that grows and evolves, as offered by a limited company?
Your industry, income goals, risk tolerance, and administrative capacity are all critical factors in this decision.
Remember, there’s no universally ‘right’ choice – only the choice that best suits your unique situation.
With thoughtful planning and a proactive approach to your business, you can navigate this transition successfully.
We can help you navigate the transition from traditional employment to freelancing. Please get in touch with one of our experts to find out more.
Leave a Reply
Cancel reply
Leave a Reply
Social
Recent Posts
- Steps for employers to remain compliant with National Minimum Wage increases
- Simple ways to invest in your team this Career Development Month
- Simple ways to invest in your team this Career Development Month
- Double cab pickups to be taxed as company cars as Government confirms U-turn
- How to ease the pressure within your business this Stress Awareness Day
Archives
- November 2024
- October 2024
- September 2024
- August 2024
- July 2024
- June 2024
- May 2024
- April 2024
- March 2024
- February 2024
- January 2024
- December 2023
- November 2023
- October 2023
- September 2023
- August 2023
- July 2023
- June 2023
- May 2023
- April 2023
- March 2023
- February 2023
- January 2023
- December 2022
- November 2022
- October 2022
- September 2022
- August 2022
- July 2022
- June 2022
- May 2022
- April 2022
- March 2022
- February 2022
- January 2022
- December 2021
- November 2021
- October 2021
- September 2021
- August 2021
- July 2021
- June 2021
- May 2021
- April 2021
- March 2021
Categories
- Accountancy
- Accounting
- Agriculture
- Apprentices
- Asset and Wealth Management
- Ben Allen
- Blog
- Blogs
- Bookkeeping
- Brexit
- Budget
- Business
- Business Advice
- Business Advice News
- Business Blog
- Business News
- Business Start-ups
- Capital Allowances
- Cash Flow
- Cash flow management
- Charities
- Corporate Tax
- Corporation Tax
- Covid-19 Home working and expenses
- Economy
- Employees
- Employment
- Employment and payroll
- Family Businesses
- Finance
- Financial News
- Financial Planning
- Fraud
- Funding
- Government Funding
- Grants
- Guide
- HMRC
- Home working and expenses
- Income Tax
- Inflation
- Inflation / Interest Rates
- Inheritance
- Insurance
- Investment
- Latest Business News
- Latest News
- Legal
- leisure and hospitality
- Loans
- Making Tax Digital
- Money
- MTD
- News
- PAYE
- Payroll
- Pension
- Pensions
- Personal Tax
- Personal taxes and finances
- Property
- Property News
- R&D
- Redundancy
- Scam
- Self Assessment
- Self Employed
- SME
- SMEs
- SMEs / Business
- Start ups
- Tax
- Tax Blog
- Tax News
- Tax Planning
- Tourism
- Uncategorized
- VAT
- VAT and MTD
- VAT deferral
- Wages
- Wealth Management