Going Freelance - How to set your company up
Going freelance for the first time is a hugely exciting new venture. New clients, new opportunities and new ways of working - it’s a big career step, with lots of benefits. But - and it is a big but - there are a lot of things to consider before taking the plunge, one of which is how to set yourself up.
There are three main ways that you can set up as a freelancer, Limited Company; Sole Trader; or Umbrella Company. Here is our guide on exactly what each option means, which may help you decide which one is for you…
Setting up as a ltd company means you charge clients as a supplier of services to their business, for payment upon invoice. You will then pay yourself with a PAYE wage as an employee of the ltd company. You will be able to pay yourself dividends to top up your income which may be more tax efficient.
You will need an Accountant to access your books, they will require invoices, receipts bank statements and so on to create your annual accounts. You will then need to submit an annual council tax return which can be done by you, or your Accountant.
As a sole trader, you operate a company from your own name, ie Dave Barker trading as “Front End Designs”.
As a sole trader you are not a separate entity from your business, and all of your income is lumped into the same tax pot.
As a schedule D sole trader you pay your own National Insurance (NI) at a rate of £2.95 per week (class 2). When you file your annual return your tax and class 4 NI will be calculated on the total profit (billings - expenses) for the year. It is important to set aside income during the year to provide for your tax/NI bill.
When using an umbrella company, they act as your employer for payment. They will sort out all of your tax and NI and pay you a PAYE wage. They will then generate an invoice for whoever you have done the work for.
The umbrella company will know what expenses can be claimed and process these for you.
To work under an umbrella company, you will need to pay a fee (normally a weekly fixed fee) upon submission of your timesheet. The fee usually covers processing timesheet, payslip creation, submission of P6s and P45s when needed. It is the umbrella company who will invoice the client, and sort VAT.
In addition to your company status, you need to decide if you should register for VAT. This is optional until turnover reaches £85k.
If you are VAT registered you charge and reclaim VAT. You collect VAT, and deduct any reclaimable VAT from business purchases and the difference is paid to HMRC. You can be VAT registered as a ltd company or as a sole trader.
If you are looking to source work through an agency like Orchard, this is how are freelance arm works:
When working through an agency such as Orchard, we find the work for you and contact you to see if you would like to take an assignment. We tell you what the rate is and what the job is and you can decide if you want to take the work.
You can work for an agency as well as working for your own clients, all we ask is when you commit to an assignment that you complete it before moving on to other work.
The agency will usually pay you the week following the commencement of your assignment, and every week thereafter for the duration of your assignment.
The work you do for Orchard is paid the week following the assignment, providing you submit your timesheet on time. That will mean that the payment will be in your account on Thursday of the week after the assignment.
We can work with you as:
LTD: We can pay you as a Ltd company, you will just need to submit a weekly invoice for services rendered from your Ltd company, along with a signed timesheet from the client you’re doing the work for. You will also be paid in full, so you will need to sort out your own tax and NI payments
PAYE: If you are anything other than a Ltd company, you will be paid under the PAYE scheme. This means you are employed through Orchard for the duration of your booking with the client. We will sort out your Tax and NI payments, and you will receive 12% holiday pay on top of your standard rate, which accrues in a separate account. You can dip into this for a day off or request to withdraw everything five days after your booking. After 12 weeks of working through an agency you will also be auto-enrolled into the pension scheme, as per recent government legislation, which contributes 1% of your wage, which the agency will match. You can of course opt out of this. You can only have your tax code with one agency; so any work you do with another agency will be emergency taxed.
Umbrella Company: When using an umbrella company, they act as your employer for payment. You will just need to submit a weekly invoice for services rendered from your umbrella company, along with a signed timesheet from the client you’re doing the work for.
For any further information or advice about going freelance, and what to consider before you make the exciting jump, get in touch with Lucy Lomas on 0161 455 0055.