Everything You Need to Know as a New Freelancer in the UK

Congratulations on becoming a new freelancer in the UK!

Whether you’re turning your passion into a full-time thing or simply looking for an alternative to the 9-5 grind, becoming a freelancer comes with plenty of perks, like flexibility, being your own boss, and setting your own rates.

However, freelancing isn’t just about picking up clients and working from your favourite café. There’s also a fair amount of paperwork, financial planning, and tax compliance to consider. But don’t worry—that’s why we’re here. In this guide, we’ll break down everything you need to know as a new freelancer in the UK, from setting up as a sole trader to managing your taxes, invoicing clients, and staying on top of your finances.

1. Deciding on Your Freelance Structure

Before you get stuck into your first project, it’s essential to decide how you’re going to structure your freelance business. In the UK, most freelancers operate as sole traders, also known as Self-Employed, but you also have the option of forming a limited company. Both structures have their pros and cons, and the right choice depends on your income, long-term goals, and appetite for administrative work.

Sole Trader

Operating as a sole trader is the simplest and most popular structure for freelancers. As a sole trader, you and your business are legally the same entity, which means you’re personally responsible for any debts and liabilities. The process of setting up as a sole trader is straightforward—just register with HMRC for Self Assessment, and you’re good to go.

Key Benefits:

• Easy to set up and manage.
• You keep all your profits (after tax, of course!).
• Fewer reporting requirements compared to a limited company.

Key Considerations:

• You’re personally liable for any business debts.
• Limited access to certain tax-saving options.
• Potentially less credibility with larger clients.

Limited Company

If you’re earning more or looking to scale your freelance business, you might consider setting up a limited company. This structure separates you from your business, meaning you have limited liability. It’s a bit more complex to manage, but it can offer greater tax efficiency, especially as your income increases.

Key Benefits:

• Limited liability protection.
• More tax planning opportunities, such as paying yourself through a combination of salary and dividends.
• A more professional image for larger clients.

Key Considerations:

• More administrative work and ongoing filing requirements.
• Higher costs, including potential accountant fees.
• Must file annual accounts with Companies House.

2. Registering for Taxes

Once you’ve decided on your business structure, the next step is to get registered for taxes. If you’re operating as a sole trader, you’ll need to register for Self Assessment with HMRC. This process allows you to report your income and pay tax on your profits.

You’ll also need to consider National Insurance Contributions (NICs), as you’ll be responsible for both Class 2 and Class 4 NICs, depending on your level of earnings.

If your annual income is expected to exceed £90,000, you’ll also need to register for VAT. While this may not be necessary for most new freelancers, it’s something to keep an eye on as your business grows.

For limited company directors, you’ll need to handle Corporation Tax, PAYE for any employees (even if it’s just you), and potentially VAT, depending on your earnings.

Important Deadlines:

• 31 January: Deadline to file your Self Assessment tax return and pay any tax owed.
• 5 April: End of the tax year—time to wrap up your accounts for the prior year.
• 31 July: Deadline for your second payment on account (if applicable).

3. Managing Your Finances

As a freelancer, keeping on top of your finances is key to staying profitable, ensuring you’re earning enough to cover your bills, and avoiding any unexpected tax bills. Start by opening a separate business bank account—even if you’re a sole trader—so you can easily track income and expenses. Mixing personal and business finances is a recipe for confusion when it comes time to file your tax return.

Keeping Records

You’ll need to keep detailed records of your business income and expenses. This includes invoices, receipts, bank statements, and any other documents that back up your financial transactions. HMRC requires that you hold onto these records for at least five years after the submission deadline of the relevant tax year.

Claiming Expenses

One of the perks of freelancing is that you can claim back many business expenses to reduce your tax bill. Common expenses freelancers can claim include:

• Office supplies (computers, stationery, etc.).
• Travel costs (mileage, public transport).
• Software subscriptions and tools.
• Professional development (courses, workshops).
• Part of your home office costs (if you work from home).

Remember, only expenses that are “wholly and exclusively” for your business are deductible.