For freelancers, going it alone brings with it a host of questions and it is their appetite for information about how to set up and how to work as a freelancer which motivated CEO Dave Chaplin to set up ContractorCalculator 18 years ago, and which now attracts over 150,000 visitors per month. Here he looks at money matters for anyone thinking of going freelance and offers some advice.
It certainly takes a special kind of person to thrive as a freelancer, but it doesn’t come without its stresses – you are responsible for finding your own work and you have to keep up with the complicated legislation and red tape that HMRC puts in the way.
However, two million freelancers in the UK think the benefits far outweigh any drawbacks. And that figure is set to grow despite the challenges and uncertainty the UK is facing as it prepares to leave the EU. But uncertain times also present opportunities for freelancers and contractors. Companies who fear the unknown aren’t keen to take on permanent staff so turn to freelancers for support who provide a low risk alternative to taking on employees.
Before you hand in your notice be sure that you could survive based on the assumption that it might take between two and four months to win your first client or contract. If you work in a high demand sector you could find a role within days or weeks.
Most freelancers would advise you to build up a fund of six month’s living expenses to cope with the unexpected and, of course, because you should be earning much more, possibly double, saving six months money may only take you six months.
Calculate your monthly outgoings and bear in mind the timings of those payments. You might finish work and get a month’s money and you might get a contract where you’re paid weekly. If you are paid monthly remember you’ll have to work the whole month and then invoice which could then take another 30 days to get paid. So be prepared and have some savings to help tide you over for the first few months.
A good accountant will give you peace of mind that your financial affairs are in proper order. Select an accountant who has a track record of managing the financial affairs of freelancers and contractors and has professional qualifications from a recognised accounting body.
More and more people are opting to manage their own finances by choosing an online cloud accounting package and then choose an accountant who can support that package. Or you can choose an accountant who has their own online solution. Either way, online accounting is now very much the norm.
Your company makes or loses money, can acquire debt and pay taxes all by itself, just like a physical person. Understanding this is important, because it explains why the legal formation of a limited company works the way it does.
Just as a baby is registered in the birth rolls when it is born, a company is registered in the official list of companies when you start it and this list is kept by Companies House.
Your accountant will be able to advise you on registering your company and the tax implications of the structure you operate under.
You might want to consider business insurance and personal insurance policies when you start out on your own and there are many insurance providers who specialise in insurance for contractors and freelancers.
Professional indemnity insurance is designed to cover you if ever a client decides to take action over an error or perceived error. It provides defence fees and possibly a payout to the client if professional negligence is proved.
You may consider this is a small risk and unnecessary. However, many agents and clients will require it as part of your contract.
On the personal front when you can’t work because of an accident or if you are ill you don’t have the benefits available to permanent employees. You may therefore want to consider health insurance, critical illness cover and life cover.
There are many specialist financial advisors you can talk to who understand how professional contractors work and have relationships with lenders who will lend to you based on a multiple of your annualised contract rate without the need for three to five years of accounts.
If you try to secure a mortgage via a “High Street” bank or building society you will probably be asked for at least three years’ accounts. This not only makes things impossible for first time contractors, but can cause a stumbling block for existing contractors who access their income via company dividends.
Fortunately, the landscape has changed over the last decade, with more lenders understanding how contractors work.
There are now many more lenders that are prepared to underwrite loans to contractors based on an annualised multiple of their daily contract rate. It is no longer necessary to have three to five years of proven accounts or earnings to secure a mortgage.
So, if you are thinking of making the move now is as good a time as any.
*Dave Chaplin is the founder and CEO of ContractorCalculator, an online resource for contractors, freelancers and the self-employed that has become the expert guide to contracting since it was launched in 1999. He is also the author of The Contractors’ Handbook which is filled with practical guidance and advice to help independent professionals to build a successful, enjoyable and profitable contracting career. The Contractors’ Handbook Third Edition ISBN 978-1-5272-1603-7 is available for £49.99 from Amazon.