Tax and Finances
As an employee of a company, your income tax, national insurance payments, student loan repayments and workplace pension contributions are all taken out of your paycheque before it is paid into your bank account. If you look at one of your payslips, you can see the breakdown. This is extremely convenient, but when you choose to be self-employed it all becomes your responsibility to manage. Failing to keep on top of it can result in fines, or even prison sentences, so it’s best to feel completely comfortable with this practice before making the jump.
Income Tax is your main contribution to the UK. The first £12,000 (although this number changes with every tax year, so it’s worth keeping an eye on GOV.uk) that you earn is tax free, then it breaks into brackets. You’ll pay 20% on your earnings up to the first bracket (approximately £32,000), then 40% up to £150,000, and 45% on anything higher than that. While it sounds complex, the self-assessment tax return system will calculate this for you, and there are many ways to claim this tax back. If you’re earning in the higher brackets of 40% or 45%, it’s sensible to talk to an accountant, as the money they can save you by planning your accounts with some professional help will more than cover their fees. At the lower bracket, it’s more cost-effective if you can do it yourself. And do note that if you earn money from your self-employed work as well as salaried work, (for example, working as a freelance designer but doing two days a week assisting at a print shop) you have to declare it all in your tax return. The total that you’ve earned during the year (and therefore the bracket that you fall into) is all of your income totalled up, minus your expenses.
National Insurance is the system that allocates funding to certain public benefits like state pension and the NHS. As a freelancer, you’ll have to organise these payments yourself. If you’re earning over the current bracket, you’ll need to pay this at the end of the tax year. However, if you’re earning under the limit, you can choose to pay it voluntarily. When you retire, you’ll only be eligible for the state pension if you have enough years logged of paying national insurance contributions, so it’s worth considering if you’re later in your career and have less time to log enough years to be eligible.
Student Loan repayments will vary for everyone. You’ll only need to worry about this if you took out a student loan to pay for your university fees. If you’re employed, these payments will be taken from your paycheque. When you do your own tax return, you’ll need to organise this yourself. You payment will be calculated based on your income, and you’ll pay it alongside your national insurance and income tax.
While financial planning is not within the scope of this toolkit, you should be aware that there is no workplace pension when you’re self-employed. In most companies, employers will offer to take a cut of your paycheque, add their own contribution and store it in an investment fund that you can access when you reach retirement age. This is not an option when you’re a freelancer.
The alternative is a Self-Invested Personal Pension, or SIPP. However, some freelancers will instead invest in property, or their own business which they will sell to pay for their retirement. There are many options, but the earlier you start to think about what you want to do when you retire as a freelancer, the better.
The flipside is that many freelancers in the creative industries work a lot longer that other industries, offering expert services with their experience, or serving in consultancy or management roles. And if you’re skilled in a specialised profession such as editing, pattern cutting or 3D modelling, you may find that you’ll always be in demand.
Note that if you want to freelance but can’t commit to doing all of the bookkeeping work yourself, there are many accountants that will do this for you, and many that will even specialise in the industry that you work in. Prices can start at around £500-£1000 per year for qualified accountants, so it can be a big commitment, especially in your first year of trading. While this is a good option for new freelancers, a strong understanding will help you price your business, manage your money and work efficiently, even if you don’t file the paperwork yourself.
Time Tracking and Invoicing
When you’ve finished your work (or at any milestone as set out by your contract) it’s time to send an invoice. While this can take many forms and can be as simple as a single side of A4, there are some pieces of information that need to be on every piece of documentation.
The word “Invoice”
Your/your company name and address
The receiver's name and address
Description of work undertaken
Your Unique Tax Reference number
The date the goods or services were provided
The date of the invoice
The total amount being charged
The total amount of VAT (if applicable)
Most of these are self-explanatory, with the exception of payment terms. These are the requirements (as set out in your contract) that describe how you are to be paid, most specifically the currency and timeframe. Most employers and companies will settle for Net 30, which is 30 days between receiving the invoice and payment being due. You may also see terms like Net 60 or even Net 90, just a lot less often. You might also bill hourly, daily or by the entire project, but this comes down to your personal preference, and the type of work that you do.
If the client breaks this term, you should refer to your contract. If you’re worried about the client paying late, set this up before the project begins. It’s impossible to enforce late fees after a contract has been signed.
If your business earns over £82,000 in a tax year, you’re legally obligated to register for VAT. Value-Added Tax is a system that you’ve probably encountered already, it’s currently a 20% surcharge on goods and services from larger business that goes straight to the Government. Once registered, you’ll need to charge VAT to your customers and clients, but you get to reclaim any VAT paid on business expenses. Once you are at this level of income, it’s strongly suggested that you bring an accountant in. They will be able to save you money through smart tax planning that will more than cover the expense of hiring them.
You get plenty of time from HMRC to get your tax return in order. The financial year runs from 1 April to 31 March, and you get until January of the next year to submit your return once the year ends. All in all, once everything wraps up at the end of March, you have nine months to fill out your return and submit it (either by post or online) back to HMRC. There are some caveats, for example, payments that were due before the end of March but were paid after, or contracts that run over the end of the tax year and into the new one. For this kind of thing, it’s best to check with GOV.uk or the HMRC helpline, who can help you figure it out. The information and process can change year to year, so we can’t advise you in much detail in this guide.
Business expenses can be complex, but keeping track of your costs is the best way to expand your business and pay less tax. When you submit your tax return, you’ll also submit a total of your business expenses, which is then subtracted from your final tax bill. Basically, when you spend earned cash on your business, you don’t have to pay income tax on it.
The kind of thing that you can claim for varies depending on your industry, so I’d suggest looking it up on GOV.uk for a current list of allowable expenses. It covers logical things like stationary, travel and marketing costs, and even some reasonable costs if you work at home for heating and electricity. These regulations change slightly every year, so it’s worth checking in before you submit your return to see what expenses you’ve logged that year that fit under one of the allowable brackets. It’s worth keeping records of all your outgoing expenses just in case you can claim them back at the end of the year.
Keeping your work safe
Storing your own projects when you don’t have an IT department can be a bit of a struggle. If you’re a photographer, music producer or graphic designer, you may find yourself with more files and versions than you can handle. While cheap external hard drives are an option, they can be unreliable, and are not really ideal to juggle long-term.
World Backup Day has some great information, including an outline of the 3-2-1 principle.
You should have three copies of all important data
Stored in two different formats
With at least one of those off-site
It’s up to you to interpret this. Photographers may want their original photos on a local USB drive, with JPEGs uploaded to a web-based service and a library of DVDs of client work at their office. Video producers may keep a copy of everything on a local server, another drive with a copy of the same data at their house, and an LTO tape setup to keep copies of the oldest work. This may seem like an expensive process to start out, but anyone who’s ever lost client work to a fire, flood or failure will tell you it’s worth it.
Sometimes tax can cause you trouble. And by the government’s own admission, it’s not easy to manage it yourself when you’re starting out. Here are some quick tips for the common issues you may face.
What do I do if my clients don’t pay me on time?
Try to resolve it amicably if you can, even if you’ve had disagreements. If you have a late payment clause in your contract, refer to that. If it looks like the client has no intention of paying you, your clause can give you backup in small claims court or with a debt collection service. However, most of the time when threatened by this, clients will settle an invoice.
If the company is being liquidated, get in touch with the liquidator as soon as you can (it will usually be a specialist legal or accounting firm). Let them know all the details about your work, and make sure they’re aware of your outstanding invoice.
How should I keep records?
A traditional paper folder is a tried and tested method, buy a scanner and a web service like Dropbox can save you some space and stress. You’ll need to keep these records long-term, in case HMRC wants to inspect them.
How much money should I put aside to pay my tax bill?
As a minimum, you should save 20% of every paycheque for your tax bill, as it’s the lowest bracket of income tax. However, you may want to bump this up to 30% or 40% to make sure that you can cover your income tax bill, national insurance payments and student loan repayments comfortably. There’s nothing worse than receiving the bill and realising you can’t pay it.
Although HMRC can offer payment plans if you can’t afford the entire bill, it’s not a great idea to allow this to eat into your earnings over the next year, and you’ll still have to pay the current year’s tax bill on top. Smart freelancers save a little too much for their tax bill, and use the surplus to go on holiday every year. I think that’s preferable.
How long should I keep client work for?
As long as has been set out in your contract. I’d advise as long as you feasibly can, as you never know when a client could come back to you to offer you more money for changes, updates and revisions. If you’re struggling for storage space (both physically or digitally) then try photographing your work to keep a record for your portfolio, or using a cheap online solution to store older work like Glacier or B2. This is much safer than keeping it all on expensive, and possibly flaky hard drives.
Should I join a union?
This may well be beyond the scope of this toolkit, but it’s important to note that unions (notably Creative Skillset’s partner BECTU) can support you in disputes with industry organisations, and can offer you legal protection, among other services. However, joining a union is a personal choice, and you can see whether it fits into your career.