Making the leap: The iMG. guide to becoming a Freelancer

Before going freelance

What to do before going freelance.

There are lots of things that may worry you before you make the leap into freelance life, but try not to let that put you off. Like most new things, if you follow a process and do what you can to stack the deck in your favour then generally things will work out ok. It's why we created this guide, so you have a process to follow and can try to avoid some of the dumb mistakes we've already made!

This is quite a long section, but probably the most important one to read, digest and revisit during your early stages of freelancing. Get this bit right and your early life as a freelancer should be slightly less stressful.

Building your financial runway

Probably the most important thing you need to do before you quit your job and decide to become freelance is build a financial runway. Your financial runway is basically the amount of time you can last, paying all of your current living costs like mortgage or rent, energy bills, car costs, gym membership etc. if you have zero income. Your first job, if you don't know already, is working out exactly how much you spend on all of your household bills and the money you need to live on each month.

How much money should you save before going freelance?

Once you've worked out what your monthly cost of living is, you then need to make sure you have enough money saved up to cover that for a period of time. This will give you a cushion to fall back on while you're setting up your business and trying to find clients.

In an ideal world, you should aim to have at least six months' worth of living expenses saved up. This will give you a safety net in case things don't go to plan or you have any unexpected costs that come up. Of course, the more money you have saved up, the better.

A good exercise to go through when reviewing your household expenses and monthly cost of living is being brutally honest with what you really need and want to spend money on. You obviously need to enjoy your time and radically changing your lifestyle is not quite the freelance dream, but being frugal with any unused gym memberships or subscription services will reduce your overall monthly cost of living and make any savings you have go further.

It's also a good mindset to get into ahead of running your business finances, where every penny spent on unused or unnecessary items or services is essentially money out of your own pocket in terms of profit.

Setting up: Are you a sole trader, an LLP or a LTD company?

Being a Soletrader

On day one as a freelancer, it's highly likely you'll start off as a Soletrader, after all, you don't necessarily need to go through the admin and cost of setting up a Limited company or Limited Liability Partnership (LLP) until you know that being your own boss is going to work for you or the financial benefits of those formal business structures outweigh being a self employed Soletrader.

Becoming a Soletrader is super simple, there's advice on the UK Gov website here, but essentially you just need to tell HMRC that you're now self-employed, then each year you'll submit a self assessment tax return which shows how much income you've made, what expenses you've incurred operating as a business, then what ever is left over; your profit, you pay tax on.

As a sole trader you pay tax on income at the same levels as if you were employed. Current tax rates are on the UK Gov site and as a Soletrader you still get the personal tax free allowance which for Financial year 22-23 is £12,750.

Paying tax as a Soletrader

You can submit your own tax return each year online, it's relatively straightforward and once you know what you're doing should take an hour or two to complete. However, we would very much recommend you get an accountant to do it for you. Not only are they experts at what they do so they shouldn't get anything wrong or get you into trouble with the tax man, but they can also help make sure you are able to take advantage of the complicated expense and tax saving opportunities that being self employed offers.

A good accountant might cost you £100-£200 for your self assessment but they could save you thousands in tax, so it's definitely worth having this sorted. You should also find an accountant either before or shortly after you go self-employed as they'll be able to tell you what records and receipts to keep as well as what items you need to keep track of as tax deductible expenses. e.g. if you buy a new laptop for your new freelance career, that's potentially a multi-thousand pound business cost that can be deducted from your profits and therefore your year end tax bill.

Top tip!

When you start trading it's important to put a good percentage of your income to one side for your tax bill normally 20% is about right. However it's also worth remembering that you will have plenty of time to pay your first tax bill too. For example if you started trading in September 2023 your first tax year end will be 5th April 2024. After that date you can submit your self assessment tax return and HMRC will tell you how much tax you need to pay. The good news is that the deadline for paying your first tax bill won't be until January 31st 2025. It means you have plenty of time to make the payment and if what you've saved up isn't enough you have some extra time to top up. Alternatively, if you've saved more than enough you can pay your tax bill then either bank that cash and add it to your financial runway, keep it saved and use it for your next tax bill or treat yourself to a holiday...

Setting up a Limited Liability Partnership

If you're starting out with a business partner then a Limited Liability Partnership (LLP) could be an option. The structure and set up are more formal than a partnership or a Soletrader, the reporting requirements are stricter and an LLP needs to be registered at Companies House. Operating through an LLP does reduce the liability of the partners involved, where a Soletrader would remain personally liable for any debts they incur regardless of whether they've ceased trading.

An LLP is simpler from a tax perspective and the cost for year end accounts while higher than a Soletrader at C.£500 - £1,000 are not as complicated or expensive as running a Limited Company.

The main disadvantage of an LLP is that firstly it has to be set up by at least two people and while it affords some protections of liability, all income is still considered personal income for the partners and all profit is taxed as such. It means they can be quite inefficient from a tax perspective compared to a Limited Company particularly if things go well and it can therefore be a challenge to retain profit in the business for growth.

Fun fact, The Inspired Marketing Group actually started out as an LLP because we wanted a structure that served both founders equally, we weren't sure our own 'leap' into freelance would work or that the business would grow and we didn't want the cost and administrative burden of a Ltd company from day one.

Thankfully things have been going ok, so we've now moved the business into a Limited Company.

Setting up a Limited Company

Forming a company is easy. You can pay a company like 1st Formations to do this on your behalf, they’ll even provide Registered Office addresses for you and this will cost between £100 and £500 depending on what services you take.

There are also plenty of benefits of being a Limited Company, over a sole trader, not least the money you can potentially earn and the greater flexibility you'll have to use the money you make. First things first, as a Director of a limited company you can pay yourself a salary, assuming you have income. Most owner / Directors take a basic tax free salary (currently £12,570 per year) to ensure they get a full National Insurance contribution, but because it's at the personal tax free threshold you pay no income tax on that salary.

You can then top up your income via dividends which is a distribution of company profits to Directors. The first £2,000 of any dividends you receive is also tax free and for any dividends you receive above that amount up to £35,700 is taxed at just 8.75% rather than the 20% you'd pay as a soletrader, plus there is no national insurance payable on that amount which which would be another 9% taken off your take home.

For example, if your total income was £50,270 made up of £12,570 in salary and £37,500 in dividends then you would pay no income tax on your salary as it's at the personal tax free threshold, your first £2,000 of dividends is also tax free so you'd just have to pay 8.75% tax on your £35,700 of dividends equalling £3,123.75. Compare this to the £12,499.20 tax and National Insurance you'd need to pay on the same income as a Soletrader and you can see why it can quickly make sense to move to a limited business.

As a Limited Company you can also claim back the contributions your business has to make towards your National Insurance. This is called the “Employment Allowance“. The Employment Allowance allows eligible employers to reduce their annual National Insurance liability by up to £5,000. Everytime you run payroll you’ll be required to make a payment to HMRC for each employee you have. That could just be you. Under the scheme you can claim against your employers’ Class 1 National Insurance liability up to a maximum of £5,000 each tax year. You can still claim the allowance if your liability was less than £5,000 a year. Meaning that element of your business is fully funded.

You can also claim a lot of other things without attracting tax and National Insurance like Trivial benefits of £300 per year as a 'close' ltd company which is a limited company with 4 directors or less for limited businesses with more directors than that you can claim £600 per year in trivial benefits which don't attract any P11D or tax. Some of your other expenses like life insurance can also be run through the business, and you can add £26 a month to your wage (tax free) for working from your own home.

As well as some of the financial benefits there are plenty more benefits of being a limited company, not least the types of businesses you can potentially work with. Many clients, particular big companies will only contract freelancers who operate as limited companies and freelancers often set up their own business for precisely this reason. It also makes you look more professional in the eyes of clients.

Running a limited business does have greater administrative and legal requirements than operating as a Soletrader e.g. your year end is a more expensive affair and you'll need to pay an accountant to do the return for you (in theory you should already have an accountant that did your Soletrader accounts.) so you don’t make mistakes or fall foul of the law. You'll pay them £750- £1,500 to complete and fill your account.

The other big thing to be aware of as a Limited Company is Corporation tax. Corporation tax is the tax your business pays on the profit it makes. Corporation tax is currently 19% of your annual profits and is calculated before any dividends are taken so while you might get some personal tax breaks running a limited company you still need to make sure you have enough cash to pay your corporation tax before you pay yourself any dividends.

If you are becoming a company director with your details on Companies’ House, you may wish opt out of the open register on the electoral roll. This is the version of the register that’s available to anyone who wants to buy a copy. This is tied to your property, and you may wish to have complete privacy. You can do this online by searching for the ‘register to vote’ service. You can also pay to have a remote Registered Office address or even us your accountants to stop your home address being visible.

Professional Indemnity Insurance

This is a must for any freelancer and will protect you financially if a client decides to take legal action against you. Many marketing experts simply don't think about this kind of thing because they are experts at what they do! If you love digital marketing or create gorgeous graphics, you aren't typically in the head space where you are worrying about what it would be like if you were to be accused of professional negligence or making a mistake in your work that incurs financial losses to your client.

Without giving you the horrors, it is a reality that they may hold you responsible for the error and take legal action to cover their losses. If a third party or competitor accused you of breaching their intellectual property - this could cost you greatly if they were to take successful legal action. That’s why this insurance matters so much.

It doesn’t take long to set up with a reputable company– but it’s well worth having, in fact, many clients or agencies will not work with you without a copy of your up to date certificate. And, it’s less than you think at around £100 to £150 a year.

Contracts

When you start working with clients you need a contract in place that protects you and them and lays out what is included in the work agreed. It will also need to include timescales, method and value of the contract, payment terms, as well as details including rules on sub-contracting, ownership of content, expenses, work and delivery expectations and a service level agreement.

It must also include provision for its termination.

You will also likely want to have a clause regarding late payments. Many freelancers charge in line with the official UK Gov advice – to quote:

“The interest you can charge if another business is late paying for goods or a service is 'statutory interest' - this is 8% plus the Bank of England base rate for business to business transactions.”

If the contract is for a set period, this should be laid out, and if the contract then becomes ‘rolling’ (going month to month) this should also be detailed.

The contract should be signed by them and by you. Do not sign a contract before they have signed it first! Send them a completed signed copy and keep one filed away in your records.

They may have their own version for you to complete to meet their terms, as well as the addition of a non-compete clause, or a signature on an NDA (Non-disclosure agreement.) This is very typical for most businesses, and nothing to worry about, but as a freelancer you need to really analyse these agreements.

For example, a clause that stipulated that you couldn’t work within the same sector or with competitors of the business for a set period could really damage your business goals, so this is something you might like to look for.

Payments

This leads onto accounting and payments! When you are a freelancer, your 'invoicing day' will become a highlight of your working month – if you’ve got your systems all working smoothly! You will be responsible for tracking the time of your projects and charging the clients for the work completed and billing them. That means having a time tracking system in place (either software, or manual tracking) as well as watertight contracts, and a means to get payment. This means setting up a business bank account and an invoicing system.

When setting up your business bank take a note of your IBAN and Swift/ BIC code that will automatically be generated. An IBAN stands for International Bank Account Number, which you can use when making or receiving international payments. BIC stands for Bank Identifier Code. It's a set of digits that represents a bank branch for international payments on the SWIFT network. Some major clients take these to set you up on their payroll systems.

Invoicing can be done using good old Excel and email - attaching invoices as PDFs and keeping a strict record for your accounts, but this can be hard to track. The more work you do, the more invoices you must handle. That's why tools like QuickBooks and Xero are very handy and come at a small monthly fee.

If you hit the VAT threshold, you’ll also need to charge VAT, all the more reason to keep an eye on your accounts. The UK's VAT registration threshold is currently set at £85,000 of turnover in a calendar year. You can opt to register voluntarily below this, and it can make you appear professional but it’s certainly not a necessity.

If you use software like QuickBooks and Xero, VAT is automatically calculated and quarterly VAT bills can be submitted at the touch of a button, so going VAT registered voluntarily isn’t as onerous as you think and can have real benefits in terms of your brand image.

Remember bank accounts are only insured for £85,000. If your bank goes out of business you can only recover £85,000 regardless of if you had more in the bank. This is also per institution, not account! You can reach that limit easily if you’re accruing for VAT and Corporation Tax. So, maybe consider spreading your money across multiple banks, but always bank with a bank that is part of the Financial Services Compensation Scheme (FSCS). Not all are!

Taxes

I know we've already said this but you should really hire an accountant. They can handle your tax, receipts, and expenses. You will be able to use your business account to pay for business expenses which they will then remove from your tax bill at the end of the year, and your accountant services are also a business expense.

When it comes to UK taxes, LTD companies need to pay corporation tax on their profits. This is currently set at 19%, so you need to make sure you put some money aside to pay this.

Once you've worked out how much tax you need to pay, you need to set this money aside each month so that you have it when the taxman comes knocking.

One way to do this is to have a separate business bank account or savings account for your personal tax bill, your Corporation tax bill if you run a Limited Company and VAT bill if you are VAT registered. This will help you to keep track of your finances and make sure that you're not spending money that you should be setting aside.

To go back to our first point, make sure you speak to a professional about how you arrange your finances and ensure you’re never left unable to pay a bill.

Follow accountancy / business tips topics on Instagram or TikTok! Yes, really! While your accountant can sweep up your records and sort your tax return, you’ll learn some of the cooler benefits from accountants on here, such as the ability to get gift cards as an ‘employee benefit’. In April 2016, HMRC introduced trivial benefits to allow businesses to gift staff small perks, such as birthday and Christmas presents, without paying tax or national insurance on them. It must be £50 or less, can’t be cash and for small LTD companies, must not exceed £300 per year. This is a savvy way to get a little treat!

Assets and marketing

If you are wanting to have a professional presence, then you need some marketing assets for yourself and you need to be your own marketing department too! Obviously, this will be second nature to you, but will typically include a website, a logo, an email address and the purchase of your domain name and hosting package.

You might also want to spend time on revamping your LinkedIn profile and social media presence, and perhaps you'll want to be able to schedule posts online too with tools like Buffer or Hootsuite.

The biggest mistake many freelancers regularly make is to get so busy and not market yourself. When you're busy, you need to be lining up the next deal and always thinking ahead. This means marketing, but also drawing up forecasts of what income is predicted ahead.

A place to work

You might be thinking - I can just set up my laptop on the kitchen table? And that would be fine! However, consider your spine! Did you know that sitting at the wrong desk can lead to long term back problems? If you are going to be working from home, then you need a place where you can set up camp and get comfy for the day. This might mean investing in a good quality chair, second monitor or even standing desk!

Here's a summary of potential costs to get freelance:

Logo, domain name for the year, hosting, and website - From £300+
Internet - £15 - £30 per month
Devices and tools - e.g., Laptop, tablet, hardware - second monitor, desk, chair - Est £500- £2000
Software- e.g., time tracking, photo editing, Canva, Trello, Adobe Suite, MS 365, Buffer, Hootsuite, SEM Rush - circa £300+
Set up of an LTD company and private business address - from £100+ (Companies Made Simple or 1st Formations are good services)
Accounting / Invoicing system - Around £12 per month
Accountant - From £500 per year - paid at year end. Costs depends on if you’re a sole trader or Limited Company
Contract creation - You may want a solicitor to review your contract agreements. This costs around £200 per hour.
Insurance - Estimate around £100 to £150 per year - this will cover you for public liability, professional indemnity, and products liability.
Business bank account- Typically charging fees at around £5 - £10 per month
Membership - e.g. iMG. and other networks/ professional bodies
Training and skills development - Do you have certification to update?
Advertising budget - would you invest in promoting posts to get visibility? This is a cost to factor in to your thinking.
Payment to others - perhaps you will need tech support, email set up or someone to sanity check your work as another pair of eyes is invaluable. Good friends can be paid in pizza and beers. Others may require cold hard cash!

It can cost between £2,800 and £3,500 to get started as a marketing freelancer. Some of these items are 'nice to have' and money can be allocated towards them as you grow your funds. You don't have to pay the marketing freelance gatekeepers £3,000 today to get started!

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