Freelancers, you need an accountant.
Updated: Nov 17, 2020
You are called a freelancer but in order to be successful you operate like a business owner. You play the role of accountant, marketing, customer services, sales, quality control, debt collector and administrator among many others. Not surprisingly, creative freelancers tend to find dealing with their finances a stressful process. They suffer self-doubt, anxiety and guilt to the point that they often submit invoices late and have trouble budgeting but don't worry, we have all been there are we are here to help you.
If you are a freelancer, you will know it comes with many perks but financial stability isn’t one of them. Paying your tax is your personal responsibility, as is setting up a pension plan for retirement.
Irregular income does not mean you need to have a lifetime of financial instability. There are plenty of blogs on the internet which tell you the basics of managing your finances as a freelancer so we won't repeat this information. Instead, we asked our community what questions were important to them and the amazing Nikki & Katherine came to our rescue. If you have any burning questions about freelancing (finance related or not) please feel free to sign up to our community and we will get them answered using the best contacts in the industry.
G E N E R A L Q U E S T I O N S
QUESTION I spend a lot of time abroad, living in Austria, but all my work is in the UK. Does it affect where I pay taxes if I spend more than 3 months a year abroad?
You are not a tax resident in a country if you spend no more than 183 days in that country so you would be classified a UK resident for tax purposes as long and you meet those rules. If you spend more than 183 days in another country, it gets a little bit more complicated. If it was just a one off, you would remain a UK tax resident. The way it works with taxation is that you do pay tax in Austria. You declare the tax you paid in Austria on your UK tax return and under the double taxation agreement you can't be taxed twice.
QUESTION What is the expected/average amount to pay for an accountant to complete and file your tax return? ANSWER Approx £200.00 - £250.00 a year (Dependent on where you are based in the UK) You might not have to pay it in one go, check with your accountant as most offer terms for monthly payments and don’t forget that you can offset the accountancy fees because its an allowable expenses so you are getting a bit of tax relief and isn't extra money that you need to find as it will end up coming off your bottom line. What you should expect from your accountant based on the above price 1. Personal interview to understand your profession and finances
2. You will be required to complete an income/expenses form
3. Your accountant will complete your tax return in full and submit on your behalf 4. Full support (you should be able to call them at any time in case of any questions or queries) The revenue have 2 years from the date of when the tax return was filed to open an enquiry into your account. We expect you to keep your own records (excel spreadsheet of receipts or electronically via receipt bank) to substantiate claims where required.
QUESTION 1. One of my freelance clients has put me on their PAYE payroll. What considerations / pitfalls do I need to bear in mind when it comes to doing a tax return as some of my pay is now PAYE and some is not? 2. If I'm freelance and I work some PAYE jobs in the year, how does this work? ANSWER Companies like to put people on the payroll as its easier for them. If they put you on the payroll, its not really a problem, depending on how much you earn, they might not take tax or national insurance at source. You would get a P60/P45 and you would just declare that as earnings in your annual tax return. If it so happens that they take tax off (they may put you on an emergency tax code) you would then just declare that when you do your tax return
QUESTION I haven’t worked this year and need to pay a tax return but have now spent all my money of living, how does this work?
ANSWER If you don't have an accountant, contact HMRC directly, let them know your circumstances and they may give you a payment holiday If you have an accountant, give them a call before you start panicking! Your accountant will be able to guide you through all of the options available based on your circumstances
QUESTION Is it worth paying an accountant on a monthly retainer basis for straightforward sole trader taxes? What are the benefits? ANSWER I would suggest finding an accountant who charges a fixed fee otherwise you could be paying for a variety of things you don't need. Agree the fee upfront and ask the company to list exactly what they will provide
QUESTION If I do some remote work for a company that isn’t based in the UK, do I charge in local currency or GBP? ANSWER? Ask the company how they prefer payment. Some companies want invoices to be in the local currency so it depends on what they prefer to do. Daily exchange rates fluctuate so I suggest that putting a disclaimer on your invoice stating that you don't lose out more than 5% on the sterling rate. When the payment hits your bank account, you bank will convert it to sterling. You will be charged for the rate of exchange which can then be claimed on your tax return as a finance charge.
QUESTION I've recently been stung by not paying enough Class 1 National Insurance - how do I know what I've paid and how may classes are there to National Insurance? Because I didn't pay enough in one of my tax years I was unable to claim jobseekers ANSWER The easiest way to check how much national insurance you have paid is by setting up a personal tax account. You can access your personal tax records at https://www.gov.uk/personal-tax-account You will be able to see a detailed report of what has previously been paid, this will also tell you any gaps in your national insurance payments National insurance office: 0300 200 3500 National Insurance class: Class 1: Employees earning more than £183 a week and under State Pension age - they’re automatically deducted by your employer Class 1A or 1B: Employers pay these directly on their employee’s expenses or benefits Class 2: Self-employed people earning more than £6,475 a year. If you’re earning less than this, you can choose to pay voluntary contributions to fill or avoid gaps in your National Insurance record Class 3: Voluntary contributions - you can pay them to fill or avoid gaps in your National Insurance record (I would try and avoid this where possible as its quite hefty!) Class 4: Self-employed people earning profits of £9,501 or more a year
M O R T G A G E S
QUESTION Is there a specialist for freelance mortgages? ANSWER Yes! We have started working closely with crunch (www.crunch.co.uk) and will get all your burning questions answered by them in the new few months
M A T E R N I T Y
QUESTION I am Canadian living in the UK so I am not as familiar with UK Maternity leave pay - but as a freelancer, what should I be doing if I want to plan to have children in the next few years?
ANSWER You need to apply for maternity allowance which is paid by the government. You can call DWP to check if you have paid enough when you make your claim. You are eligible for maternity allowance if you have paid your class 2 national insurance for at least 13 of the 66 weeks before your baby is due, this will enable you to claim (£151.20 a week for 39 weeks) If you don't earn enough, make sure you pay your class 2 national insurance. You can force through this option on your tax return We suggest that you save in addition to the maternity allowance Once you have children you need to claim child benefit to ensure they have a NI number and state pension but you might have to pay some or all of it back. Allowance: £20.70 for your first child and £13.70 for subsequent children If one or both of you are earning more than £50,000.00 then this allowance will need to be paid back For more information on childcare vouchers, please visit www.gov.uk/help-with-childcare-costs/childcare-vouchers Child tax credit is a benefit that is paid tax free which is income based on a sliding scale for eligibility. This is income based so it is slightly different to the child benefit.
P E N S I O N S
QUESTION I'm mystified by pensions! I contribute national insurance so I'll get the basic government pension (I hope?) but should I also be saving into a private fund? What are the benefits of this vs saving in a savings account in general ANSWER As long as you have made or been credited with national insurance contributions for at least 10 years, you will be entitled to a State Pension. The full State Pension is £175.20 per week. Savings into a private pension arrangement benefit from basic rate tax relief – so for every £80 you pay in you will receive £20 tax relief. If you are a higher rate taxpayer you may also benefit from higher rate tax relief (a further 20%) on some or all of your contribution. You can make contributions each year up to the level of your net relevant earnings. Private pension arrangements can be accessed from the age of 55, and are now extremely accessible and flexible. Whilst invested in a pension, you will benefit from tax efficient growth, and when you do decide to take a withdrawal from your pension, you can take up to 25% of the fund value tax free, and the remaining 75% is classed as taxable income. The interest rates available on savings accounts are very limited at the moment, so the return on cash deposits is fairly minimal. By investing into pensions or Stocks and Shares ISAs, you can access equity-based funds which provide the potential for capital growth over the medium to long term (5 years plus). Investing in equities does have its risks as stockmarkets can go down as well as up – the most recent example being the coronavirus pandemic which had a big impact on stockmarkets through March and April 2020 (although we are seeing things start to improve now) – as advisers, we would analyse your attitude to risk and select funds which meet with this risk level so we are not putting you into anything which is too volatile and makes you uncomfortable.
QUESTION I'm also baffled by pensions, I'm a self-employed freelancer of 15 years, I'm now 44 and haven't been saving into a private pension, but should I be? Have I left it too late to accumulate a decent enough lump sum for when I 'retire'? ANSWER It does still make sense to start saving into a private pension, as any contributions you do make can build up your provision for retirement. The recent improvement in the flexibility of private pensions make them more appealing – essentially you are building up a big pot for retirement and you can access this how you want to from the age of 55. You could decide to withdraw the whole pot in one go (although this is not what pensions were designed for, and may not be the most sensible option depending on your tax position), or you can take adhoc or regular withdrawals to supplement any other income you may have. I have a lot of clients who want to retire before their State Pension starts, and they may use a private pension to bridge the gap between retirement and state pension age. The income from a private pension can be amended or stopped at any time so, for example, you may want to reduce your working hours and use your private pension to replace lost earnings, you could then stop this income when your state pension starts. As above, savings into a private pension arrangement do benefit from basic rate tax relief – so for every £80 you pay in you will receive £20 tax relief. If you are a higher rate taxpayer you may also benefit from higher rate tax relief (a further 20%) on some or all of your contribution. You can make contributions each year up to the level of your net relevant earnings.
QUESTION Which ISA, savings, pension schemes are the best? ANSWER It depends to some degree on how much you are looking to save, your timeframe and your attitude to risk – this is something which we would analyse as your financial adviser and recommend the most suitable contract for you. We use Investment Platforms, meaning you can hold ISAs, Unit Trusts and Pensions on the same platform – keeping your finances straightforward, as you have one set of login details and receive one statement (rather than paperwork from several different companies). Investment Platforms will allow you to invest in funds from many different investment managers – meaning you can diversify to reduce the risk and you are not solely relying on one investment manager making the correct decisions. We work a lot with funds which are actively managed and/or managed on a discretionary basis which means your funds are continually managed (so you don’t have to worry about them!) – this level of management is very important, especially when we are experiencing volatility like we are at the moment as a result of the Coronavirus pandemic.
If you are looking for an accountant, we highly recommend Nicola Argent, you can reach her on firstname.lastname@example.org