In the world of work, freelancing is an increasingly popular option. The promise of flexibility, unlimited earning potential and complete control over the way you work is a hugely attractive prospect for many.
Although freedom is one of the big draws of the freelance lifestyle, there are still plenty of financial responsibilities that come with it that can really eat into your time and profits.
But do freelancers really need the services of an accountant? Let’s find out.
What is a freelancer?
First, what is a freelancer? Freelancing is a term which covers many different types of work. Taxi drivers, IT consultants, wedding planners, supply teachers and hairdressers are just some examples of the types of jobs which fall under the freelance category.
Simply put, a freelancer is someone who charges clients for a service, which is usually provided on a per-project or short-term basis.
How are freelancer finances different?
So, what makes the way a freelancer earns their money different?
A key factor is that a freelancer is not taxed at source. In the UK, most salaried employees are taxed by their employer before they receive their net earnings. This means that so long as their tax code is correct, all their Income Tax and National Insurance (NI) as well as any pension contributions are deducted before they receive their wages.
Freelancers are different. Whether they choose to trade as a sole trader or through their own limited company, freelance workers must calculate and pay their own tax to the government after invoicing their clients for a gross amount.
In the case of sole traders, this is done through an annual Self-Assessment. Sole traders earning over £85,000 annually must register for VAT, too, although VAT registration can also be a good option for some under this threshold.
Freelancers who trade through their own limited company have even more to consider when it comes to their accounting requirements. These include preparing and submitting annual accounts, directors meetings, shareholders and dividends, VAT returns, Corporation Tax liabilities and cash flow planning.
Freelancers should also be clued-up on the recent IR35 reform, which is in place to prevent ‘disguised employees’ paying the wrong amount of tax by acting for all intents and purposes as an employee, but self-declaring as a contractor for tax purposes.
Specialist Freelancer Accountant
Working as a freelancer means that you are working for multiple clients on a temporary basis, and it is important that you hire a specialist freelancer accountant. Using QAccounting brings advantages and benefits to how you operate and makes your life significantly easier throughout the year.
Why freelancers should hire accountants
1. Time is money
While this motto rings true for many people, for freelancers it should be taken literally. You’re either charging clients on an hourly basis, or per project, which means that taking days out of your working month to do your own accounting could be costing you hundreds of pounds in missed work.
A DIY approach to accounting is often a false economy, with what you’d spend on an accountancy service nothing compared to the revenue you could be making by freeing up more time to carry out paid work.
2. Your downtime is crucial
Yes, technically you could use your free time to catch up on the accounts. This is time that you wouldn’t be billing for anyway, so you won’t be losing out on earnings. However, you’ll be losing out on something which is arguably more valuable – time to rest, relax, recoup and spend time with family and friends.
As a freelancer, it’s important to get that work/ life balance right, and if accounting is eating up time you should be spending ‘off the clock’, it’s a sign you need to call in the professionals.
3. Your strengths lie elsewhere
Whatever your line of work, if you make a living doing it, we assume you’re good at what you do.
While you might be a numbers guru who’s not scared of a spreadsheet or two, you’d still benefit from things like streamlined bookkeeping, automated invoicing and preparation of tax returns and accounts on your behalf.
So, whatever you do, you’re probably best concentrating on your day job and outsourcing the time-consuming accounting tasks to a professional service.
VAT can be a tricky area, with many freelancers not knowing where they stand with regards to registering for it. Freelancers making over £85,000 pa must register for VAT, but in some cases VAT registration is advisable under this threshold, for example to claim VAT reductions on items bought for business use.
If you are VAT registered, VAT returns are due to HRMC every three months – something which an accountant can help with.
5. IR35 compliance
The recent IR35 reform in 2021 has seen freelancers and independent contractors concerned about whether their employer and HMRC see their business structure in the same way they do. Working inside IR35 means a freelancer is technically an employee, and should be treated as such for tax purposes.
This is a tricky area for freelancers and the prospect of an IR35 investigation hanging over them can add stress to an already stressful line of work.
An accountant who specialises in IR35 regulations can ensure you can prove you’re working outside IR3, and even help defend you should HMRC begin an investigation into your business.
6. Tax efficiency
A professional accounting service can help your freelancer business operate in the most cost-effective and tax-efficient manner possible.
Ultimately, you want to take as much of your hard-earned cash home with you as you can, while fulfilling all your legal tax obligations.
An accountant can help you understand and consider your income sources and the best way to pay yourself. If you’re a limited company director, this could look like a planned combination of salary and dividends, taking into consideration your individual taxable benefits.
Accountants for freelancers
Whether a freelancer is a sole trader or trades through their own limited company, there’s plenty of financial admin which can really pile up on unsuspecting freelancers who are concentrating on the day job.
For freelancers, hiring an accountant isn’t a luxury you can do without. In fact, a good accountant is usually key to the success of a freelance enterprise – helping you save time, save money, stay compliant and help identify areas for growth.
Chancellor announces that IR35 reform will be scrapped
IR35 reform in both the private and public sectors is to be repealed, the Chancellor announced in the mini Budget, held on Friday 23rd September.
This surprise development made up just one of many welcome tax changes, as Liz Truss’s new-look government promised to start “a new era” and unleash the potential of UK business.
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It’s an often-quoted statistic that around 60% of businesses fail in their first three years – with 20% folding within just twelve months.
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