Out of the financial comfort zone

In the first of a new series on the self-employed, we look at the initial challenges of going it alone

Take a deep breath and wave goodbye to all you know. As you leap from a full-time job to self-employment, you won't only have to find work for yourself, you will be responsible for every aspect of your financial life.

Instead of an employer forking out for your pension, holidays, sick pay and maternity or paternity leave, you'll have to cover all that yourself. Income tax payments and national insurance contributions (NICs) will be your responsibility too.

In the language of business self-help guides, going self-employed will make you a master of your own destiny. But it will also make you a slave to your finances as you try to keep your head above water and the taxman off your back.

Here's our guide to the first few steps into the financial unknown.

Tax

You must register your new status as self-employed by phoning the tax office on 08459 154515 or going to www.hmrc.gov.uk. Going freelance will also mean you need a new tax code.

National insurance

When you were in full-time work, your company took care of deducting NICs from your payslip as well as paying employer's contributions itself.

In your new, self-employed life, you will have to pay two sets of contributions, known as class 2 (currently £2.10 a week) and class 4 (8 per cent between £5,035 and £33,540).

You can either pay monthly, by direct debit, or twice a year when you settle your tax bill.

Expenses

Hold on to receipts for dear life.

It might be hard to believe, but when you are freelance, tax can become fascinating. This is primarily because, with a bit of effort from yourself (and, perhaps, an accountant), you can slash your tax bill in a way that employed people never can.

You do this by gathering up as many business expenses as you can through the financial year that runs from 6 April, and then offsetting them against your overall income in that same 12 months.

The tax office itself will give you a list of basic expenses that are allowable (see the website above or ask for advice leaflets), though these will be conservative. As a rule, keep receipts for everything. Even if you don't think they could be classed as business expenses, an accountant might disagree. So until you have enough experience to know what is and isn't allowable, just keep everything.

You can include expenses incurred up to three years before you started your business. For example, if you bought a computer 18 months ago, part of that can be put towards your expenses - again, as long as you kept the receipt.

Don't forget items that are not obvious as allowable expenses. These include: "subsistence" - lunch, hotel costs and dinner if you go away for business; "sub-contractors", such as the researcher you brought in for a day to help with a project; and "workwear" - Wellington boots for a gardening business, say.

It's worth attending one of the many free talks and workshops given by the taxman for newly self-employed people. Check www.businessadviceday.co.uk for availability.

Bookkeeping

You can keep records of income and outgoings either in actual ledger books (from WH Smith or Ryman, for example) or on the computer using Excel spreadsheets or bespoke packages such as Sage. Try to input your information regularly - at least once a month - so it doesn't become a gargantuan job at the end of the year.

Set up a separate bank account for your work but, in the early days at least, don't bother with a "business account". These are expensive (with hefty charges) and largely pointless for the freelancer.

Simply open a "Number 2" account with your existing bank and make sure your business transactions go through it.

Number-crunchers

You might be tempted to get an accountant to handle all aspects of your finances but this will add costs that, in the early days, can hit you hard. Most will charge a flat fee depending on what kind of work it is, though for basic bookkeeping expect no more than £100.

A recommendation from a family member or friend can be a good start, or you could search the website of the Association of Chartered Certified Accountants: wwww.acca-business.org/dom/

Keep money aside

When you first get paid as a freelancer, you might think you're doing better than ever, but that could be because your money hasn't been taxed. Come January, and then June, you will receive the demand that gives you just under a month to pay Revenue & Customs.

So set up a high-interest savings account (go online and look at www.moneyfacts.co.uk or www.moneysupermarket.com for the best deals) and transfer around 10 per cent of your earnings into it each month. This should cover you when the bill arrives.

'I got into trouble over tax'

Freelance consultant Tira Shubart learnt the hard way about keeping records and setting money aside for Revenue & Customs.

"I got into trouble over tax a number of times due to a lack of forward planning," she says.

"The idea of simply keeping a deposit account, and regularly putting money into it, eluded me for a number of years.

"Or I would be convinced that more work would suddenly come in and that would cover my tax bill," she adds.

Thankfully, the taxman was able to help her work out a payment plan.

Tira now does her own bookkeeping each month in ledger books and finds the process therapeutic. "It makes me feel I can look at the books next to my desk and believe life is in order."

Anyone toying with the idea of self-employment needs to do a lot of research, she stresses.

"It's critical to talk to people who have been there before and gone freelance.

"And talk to the people at Revenue & Customs, who can be surprisingly helpful. They may give you conservative advice, but it's a great start."

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Life and Style
Fans line up at the AVNs, straining to capture a photo of their favourite star
life Tim Walker asks how much longer it can flesh out an existence
Life and Style
Every minute of every day, Twitter is awash with anger as we seek to let these organisations know precisely what we think of them
techWhen it comes to vitriol, no one on attracts our ire more than big businesses offering bad service
News
Professor David Nutt wants to change the way gravely ill patients are treated in Britain
people Why does a former Government tsar believe that mind-altering drugs have a place on prescription?
News
Norway’s ‘The Nordland Line – Minute by Minute, Season by Season’ continues the trend of slow TV
television
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment
art
Sport
Jonny Evans has pleaded not guilty to an FA charge for spitting at Papiss Cisse
football
Life and Style
Kate Moss will make a cameo appearance in David Walliams' The Boy in the Dress
fashion
News
The image released by the Salvation Army, using 'The Dress'
news
Sport
Liverpool defender Kolo Toure
football Defender could make history in the FA Cup, but African Cup of Nations win means he's already content
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Customer Relations Officer

    £13000 per annum: Recruitment Genius: This is an exciting opportunity to join ...

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Jemma Gent: Project Coordinator

    £12 - £15 Hourly Rate: Jemma Gent: In this role you will report to the Head of...

    Recruitment Genius: Evening Administrator

    £8 per hour: Recruitment Genius: This Pension Specialist was established early...

    Day In a Page

    Homeless Veterans campaign: Donations hit record-breaking £1m target after £300,000 gift from Lloyds Bank

    Homeless Veterans campaign

    Donations hit record-breaking £1m target after huge gift from Lloyds Bank
    Flight MH370 a year on: Lost without a trace – but the search goes on

    Lost without a trace

    But, a year on, the search continues for Flight MH370
    Germany's spymasters left red-faced after thieves break into brand new secret service HQ and steal taps

    Germany's spy HQ springs a leak

    Thieves break into new €1.5bn complex... to steal taps
    International Women's Day 2015: Celebrating the whirlwind wit of Simone de Beauvoir

    Whirlwind wit of Simone de Beauvoir

    Simone de Beauvoir's seminal feminist polemic, 'The Second Sex', has been published in short-form for International Women's Day
    Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

    Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

    Why would I want to employ someone I’d be happy to have as my boss, asks Simon Kelner
    Confessions of a planespotter: With three Britons under arrest in the UAE, the perils have never been more apparent

    Confessions of a planespotter

    With three Britons under arrest in the UAE, the perils have never been more apparent. Sam Masters explains the appeal
    Russia's gulag museum 'makes no mention' of Stalin's atrocities

    Russia's gulag museum

    Ministry of Culture-run site 'makes no mention' of Stalin's atrocities
    The big fresh food con: Alarming truth behind the chocolate muffin that won't decay

    The big fresh food con

    Joanna Blythman reveals the alarming truth behind the chocolate muffin that won't decay
    Virginia Ironside was my landlady: What is it like to live with an agony aunt on call 24/7?

    Virginia Ironside was my landlady

    Tim Willis reveals what it's like to live with an agony aunt on call 24/7
    Paris Fashion Week 2015: The wit and wisdom of Manish Arora's exercise in high camp

    Paris Fashion Week 2015

    The wit and wisdom of Manish Arora's exercise in high camp
    8 best workout DVDs

    8 best workout DVDs

    If your 'New Year new you' regime hasn’t lasted beyond February, why not try working out from home?
    Paul Scholes column: I don't believe Jonny Evans was spitting at Papiss Cissé. It was a reflex. But what the Newcastle striker did next was horrible

    Paul Scholes column

    I don't believe Evans was spitting at Cissé. It was a reflex. But what the Newcastle striker did next was horrible
    Miguel Layun interview: From the Azteca to Vicarage Road with a million followers

    From the Azteca to Vicarage Road with a million followers

    Miguel Layun is a star in Mexico where he was criticised for leaving to join Watford. But he says he sees the bigger picture
    Frank Warren column: Amir Khan ready to meet winner of Floyd Mayweather v Manny Pacquiao

    Khan ready to meet winner of Mayweather v Pacquiao

    The Bolton fighter is unlikely to take on Kell Brook with two superstar opponents on the horizon, says Frank Warren
    War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

    Baghdad fights to win back Tikrit from Isis – but then what?

    Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable