The financial side of freelancing

If you’re thinking of taking that step into the freelance world there will be a load of decisions you need to make. Aside from the usual ones – will I get enough work? How should I deal with clients? I’m going to look at one of the more practical decisions – should I operate as a limited company or a sole trader?


I’m a visual and UI designer, I have worked as a full time employee for various agencies and startups for around 5 years before deciding to take the step into the freelance world. I made the change in October last year and I haven’t looked back since. A big portion of my income comes from contracting for agencies and startups, which had an impact on my decision.


There are some pretty major differences between being a sole trader or choosing to incorporate a company with yourself as director. There are a lot of articles out there that lay out the differences pretty well, so I won’t go into them too much here.

It boils down to how much you expect to earn, how prepared you are to do more admin for the sake of paying less tax, that sort of thing. Its worth noting that as a sole trader you would personally be liable to any debts should your venture go wrong, but as a limited company you’re not personally liable. Limited companies need separate business bank accounts, but a sole trader can use their existing personal accounts.

The big question is which way is likely to make you more money. There’s no simple answer, as it depends on how much you may make, how much you pay yourself and how you go about paying it, but it’s a reasonable guide to expect that anything over around 35k a year and you will pay less tax/NI as a limited company, provided you operate in the most ‘tax efficient’ way. If your freelance operation is something on the side of another role that you do for some extra cash then I wouldn’t consider setting up a limited company but should it become your sole source of income then a limited company may well become the more attractive option.

Another option is the umbrella company. I rejected this one straight up as basic take home pay calculations, even including my accountancy fee, showed that the umbrella company would be creaming lots of my money off into their own pockets without actually doing much. Sure, you just give them a timesheet and they handle the rest (your client pays the umbrella company).

This could be a decent route; maybe you’re between roles and have a contract come up but you know it’s just short term and want to go back to working for someone in the end. However, my own personal feeling on umbrella companies is to avoid them like the plague – having run a limited company for a few months now, I can’t see what they do that comes anywhere close to justifying their fees.


If you are going to go down the limited company route then you need to consider a few things when working out your budgets and costs. Allow some cash for good accountancy, I can’t stress this enough. Ideally you want an accountant who knows the freelance/contract world and is happy to offer advice and guidance as much as the practical services like filing accounts. A good accountant will be able to advise you how to set up in the most tax efficient way ensuring you take home as much cash as you can. It’s likely to be a setup where you pay yourself minimal salary and take the rest in the form of Dividends, which are free of NI contributions.

There are some costs associated to setting up the company in the first place. You may also want to use a registered office service or similar to avoid having your home address as the company’s registered office, which could be an issue if you’re in rented accommodation.


A limited company can be VAT registered, which is actually a nice way to make a few quid back from the lovely folks over at HMRC. If you’re turning over above £70k a year then you have to register for VAT, but anything under that and it’s entirely optional.

Flat Rate VAT

I’m VAT registered on the ‘flat rate’ scheme as they call it. It means I charge my clients VAT at 20% but actually pay HMRC VAT at 14% due to the sector my business falls into. Thats a few extra quid coming my way on every invoice I charge, which is nice. You can also claim back VAT on any invoices you owe, but not on expenses. Once your turnover and profits reach a certain level HMRC will take you off the flat rate scheme, as I’m not there yet I can’t really tell you much about how that works.

The VAT decision is one you should make depending on the clients you envisage getting. I contract around London agencies and startups, who are usually VAT registered themselves and will be able to claim the full 20% back. If you’re more likely to be working with small businesses which may not be VAT registered you need to keep in mind that any prices you quote have to have 20% added to them, and a non VAT registered business will have to pay that in full.

It’s worth noting that oversees clients outside of the EU are fully exempt from VAT. I was worried about how to handle the subject with my US based clients at first, until I asked my accountants. I simply don’t add VAT to invoices for US companies.

Image & Professionalism

Before going freelance I spoke to a few contacts I have out their in the big bad world of recruitment. I wanted to get a feel for the contract market in London and see if these guys would be a good place to call if I find myself in a dry spell. I got some great insight into how active the London contract world is, but the main take away was that these reciters are unlikely to work with anyone who isn’t either a limited company or working through an umbrella agency. They don’t like to work directly with sole traders and its unlikely they would do. If you want to use recruiters to find contract gigs, you’re going to need to be a limited company.

Some clients may feel more comfortable being invoiced by, and paying, a limited company. VAT registration can also add to your image of being established and somewhat bigger than you are.

Bank Accounts

I had a massive headache with this, mainly due to the sheer incompetence of my chosen bank. To cut a really long story short it took over a month to open my businesses account but that is unusual and was caused by a series of events that would be difficult to reproduce.

That said, it should be a fairly easy process. The bank will want to know a few things, like your expected annual turnover for example. Also keep an eye on potential charges, you may well get all your banking for free for the first 12-18 months and most of the highstreet banks offer startup businesses accounts with terms like these.

Get the ball rolling with your chosen bank quickly so that your account is open and ready when you start invoicing people. My personal advice based on my experience – avoid Lloyds bank at all costs.


Keeping on top of the admin, thats the boring stuff no one wants to talk about. It’s shit, but it’s got to be done. Let this sort of stuff build up and you’re in trouble. Use decent accountancy software and get an accountant who’s familiar with it.

Personally, and this is just a recommendation based on what I use, I can’t fault Crunch. I pay a flat fee a month and they handle my accounts and are there for support whenever I need them. They were great in the first few weeks as I tried to find my feet and get my head around all the business things that I’d been blissfully ignorant of. Crunch features some Freeagent like software that allows me to issue invoices, add payments, add expenses, create payroll runs and issue dividends. It does everything, and best of all, provided I keep it all up to date, it gives Crunch everything they need to file all my accounts for me.

If you don’t use a service like Crunch and decide to do it all yourself the same applies – record everything, and do it as quickly as you can do. Freeagent looks like a great option for this, especially when paired with an accountant that can take your Freeagent data and use it to file your accounts for you.

Getting Money

Theres no point earning it if you can’t get it. This is where a decent accountant will really save you a few quid. With a limited company, you can pay yourself a salary or a dividend. Salary payments (PAYE) encounter NIC (National Insurance Contributions) and Income Tax. NIC’s have to be paid both by the company and the employee. You don’t want to be fully paying yourself PAYE – it will cost you a lot of tax and maybe even make you worse off. A combination of PAYE and Dividends are the best, ideally taking you to the personal income tax threshold and no higher as PAYE and making up the rest in dividends. Seriously, speak to an accountant.


The big scary elephant in the room of the contracting world – not even HMRC seem to know when IR35 may come into play or not, or if they do, they don’t want to share with the rest of us. (Maybe they’re too busy chasing the big corporations for the tax they owe, but that doesn’t seem likely)

IR35 is legislation designed to stop people contracting for a company when they should be employed by them directly. It’s to stop companies and contractors avoiding their NI contributions by paying their staff via an invoice form a company rather than PAYE like an employee. It’s tricky to make sure you don’t fall into this, and it may be bad news if you do.

A lot of the issues around IR35 come from the contract you sign and how its worded. Avoid contracts that give you a place and times of work – a true contractor should have the flexibility in this area. Also try to avoid contracts that are too general – try and get contracts or Schedules of Work for individual projects.

If you’re worried – get in touch with one of the IR35 contract checking services out there who will have a read of your contract and tell you if you should fall in or out of IR35.


If it’s all going well after a while you may decide that its time for your business to grow. Being a limited company means that structurally you should be ready to grow as soon as you feel like you have the work.

It’s a potentially scary move when worrying about clients, contracts and designing awesome shit, let alone admin, tax, accountants and all that jazz. Don’t be scared off, it’s not as confusing as it seems. The best advice I can give:

Choose a Limited Company if Freelance is going to be your main income source and you want to work with agencies/companies as a contractor or want to grow your businesses (maybe to an agency or similar with employees).

Get a good accountant/Accountancy Service/Software- Take the hit and pay the money for someone good, or just suck up the flat fee of a service like Crunch. It’s worth it. It may be tempting to save a few quid and do a lot of it yourself, but that could be a trap that costs you more than it saves. Consider your hourly rate to clients, then consider how many hours a month you may spend doing the admin. Chances are the numbers tell their own story. Get good software that handles issuing invoices and things for you.

Register for Flat Rate VAT – It’s money that would otherwise be going to HMRC, make sure you get it. It’s easy to register and keep a track of VAT, especially if you have a good accountant/accountancy service. You may want to think more about this one if you’re going to be dealing with lots of smaller companies.

Be aware of IR35 – Keep it in mind, carefully read any contracts clients give you if you’re looking to go into the contract world. Don’t be scared to ask them if they think it is IR35 friendly, if they use or have used freelancers and contractors in the past then they should know all about it. If in doubt, get your contract checked over by an external service or your solicitor.

Stay on top

Keep on top of your admin and paperwork. Keep records of everything and keep physical receipts/invoices should you get them. Record invoices and payments as they are issued and made and add expenses often.

Most importantly, enjoy it. Whats the point if you don’t? Running a Limited Company is quite simple if you use the right services and keep on top of everything. I don’t spend much time on the admin or business tasks side of things, and I actually enjoy it. I can’t recommend services like Crunch enough, genuinely, theres no referral code in there 😉 – they make my life so easy.

Hopefully some of this is valuable to you, or gives you an insight into the things you need to think about. I’ve not hit on everything, and like all of these articles, speak to an accountant before you make any big decisions.

Ben Garratt

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