Swapping an office for a sofa also means a crash course in managing her finances for newly self-employed Marie-Claire Chappet
I recently became self-employed. My commute is 50 seconds from bedroom to study, my dress code includes, but is not limited to, my pyjamas, and the only person likely to yell at me is my cat.
It’s a charmed life in many ways but freelancing is not all mojitos for breakfast when it comes to managing your finances. You may be wondering what a self-confessed money dunce is doing embarking on an employment track that, crucially, requires a nuanced understanding of finance.
It’s true, I am horrendously confused, and I can’t be the only person. A recent government study found 15% of those in the UK labour market are self-employed. A fair few of these are my generation: between 2008 and 2015 there was a 51% increase in the number of freelancers aged between 16-29.
“Initially I knew nothing either,” sympathises Kimberley Harvey, 30, a freelance choreographer for more than five years, “I had to learn as I went along.”
This is not comforting. I never picked up my times tables — how will I get to grips with the tax system?
“Get an accountant,” advises Chris Barnard, the senior technical accountant at Crunch, an online accountancy firm. “Over 50% of our clients are first-time self-employed. They don’t know what’s going on and need reassurance. You can make so many mistakes if you are doing it yourself.”
Jennifer Hatch, from a top accountancy firm in London, agrees that professional help is vital but she also recognises that a private accountant is beyond many people’s budgets, and points me instead towards the very useful free information on gov.uk and HM Revenue & Customs websites. She also advises me to write a good business plan. But I’m not a business . . . or am I?
Decide what you are
There are (who knew?) three types of self-employed worker. You can register as self-employed, a sole trader or a limited company. It’s my first road block: what to be? The second sounds as if I should have a market stall and drive a Reliant Robin, and the latter implausibly grand when I’m largely working in my jammies.
Sole trader seems initially to be the best fit for what I am: an individual with a business of, well, one. It’s cheaper from an accountancy point of view (I’m a money dunce — of course I’ll be using an accountant) and appears straightforward to set up. Yet the benefits of a limited company also appeal, chief among them the division of your personal and “business” assets.
“It legally separates you from your business and can limit your liability should the company go bust,” says Justin Modray of Candid Financial Advice.
Richard Garth, 35, agrees. He left full employment two years ago to start a tree surgery business and tells me he became a limited company precisely so he could “reduce the risk to my wife”.
Hatch agrees there are advantages but points out: “From an administrative point of view, a company may be more costly and time consuming, as you need to file annual accounts with Companies House; probably run a payroll scheme, which has monthly filing requirements; and file an annual confirmation statement. If you are registered as self-employed, you just file an annual self-assessment return.”
Tax has been troubling me. Rather than being teased by a pay slip that tells me precisely what I should have got then the measly amount that’s left post-tax, the money that comes into my bank account as a freelance is exactly the sum I was promised. I am fully aware the taxman is looming — I’m just not aware of the most efficient way to pay him.
“If you are self-employed, you pay income tax on the full amount of your net profit,” says Hatch. “If you run a company, you pay corporation tax on your net profit and income tax on any earnings you take from the company by way of salary or dividend. If you retain profits within the business for investment in the growth of that business, then a company rather than a self-employed structure may have some tax advantages.”
Should corporation tax remain at 19%, this advantage will persist, but the taxation system is always subject to change. From April 2018, those who are self-employed and earning above £83,000 will have to file their taxes online. This change will be enforced for all self-employed persons from 2019.
Barnard stresses the importance of keeping a separate bank account for tax only. Should I register as a limited company, a separate business account is essential, but he suggests keeping an account for work regardless. That way your account history is simple; all incoming and outgoing money is work-related.
Don’t forget your expenses
Keeping records is especially important when it comes to expenses, something I am genuinely surprised to hear that I can claim from HMRC. This can include travel for meetings, stationery, even a flat monthly fee of £10-26 for your internet, depending on your working hours.
“The key with being self-employed is to claim all permitted expenses to reduce your tax bill,” says Modray, noting that you are taxed on your profits minus the cost of your expenses. “And if you run a limited company, striking a sensible balance between salary and dividends should also save you tax, since dividends are not subject to national insurance”
Save for a pension
You only pay national insurance on profits above £8,164 but it is advisable to make voluntary contributions regardless.
As Barnard says: “You don’t want gaps. It’s a good idea to make additional pension contributions into a separate pension pot.”
That’s if you can, of course. As Harvey tells me: “I can’t afford to. Pay in the arts is pretty appalling.”
Getting a mortgage
Besides the manoeuvring it will take to ensure regular pension payments, I’m terrified at the thought of how difficult my mortgage application will one day be.
Adrian Anderson, director of property finance specialists Anderson Harris, agrees it can be tough: “Too many self-employed people just assume they cannot get a mortgage.” Certain providers are sympathetic to the self-employed — he names Metro Bank and Scottish Widows among a handful of others — but you are still at a certain disadvantage
“Banks need to provide more nuanced, considered mortgage applications that take into account the whole package,” he says. “But big banks are always behind the times — they are playing catch up on this issue”
It seems to me everybody is. While the “gig economy” only recently crept into modern parlance, Barnard sees it as a longstanding issue that is only now gaining the attention it merits. The solution, he says, is to recognise this third branch of employment status: “We only treat people as employed or self-employed; we don’t cater to this middle ground. It’s a cultural change that needs to happen.”
Harvey believes all those not in salaried employment deserve recognition. “It would be great if we were granted a higher status in the economy,” she says.
We’re still working, after all. Even if it is in our pyjamas.