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
Sunday 04 June 2006
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.
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.
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.
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.
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.
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
Derek Pain: I'm cautious, but remain one of the few bulls in the market
Donald MacInnes: Who would want to be a Barbie girl in a non-Barbie world?
Mark Dampier: How to get an income now that savings are past the 'use by' date
Thousands of UK investors could lose out following collapse of Secured Energy Bonds
Bargain Hunter: Fly off for a winter break in France or Portugal for well under £100
- 1 Stephen Fry explains what he would say if he was 'confronted by God'
- 2 Venezuela Expo Tattoo 2015: Extreme body art from 'Vampire Woman' to 109mm earlobes
- 4 Ball pool for adults opens in London
- 5 Canadian woman suing police who locked her in van with sex offender who then raped her
Stephen Fry explains what he would say if he was 'confronted by God'
9 reasons Greece's experiment with the radical left is doomed to failure
Have we reached 'peak food'? Shortages loom as global production rates slow
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
Liberal Democrat minister defends comments suggesting immigration causes pub closures
Hard line on immigration could cost Tories the election
iJobs Money & Business
£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...
£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...
£13000 per annum: Recruitment Genius: This Pension Specialist was established ...
£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...
Day In a Page
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion