Are you excited to set up as a freelancer? Ready to be your own boss and finally get to enjoy a little more work-life balance? Want to make sure you’re doing everything the right way from the start? Freelancing can be a great way to take control of your hours, your income and your life.
But there are a lot of mistakes you can make as a newly self-employed freelancer. And you certainly don’t want to start by getting the important legal stuff wrong. The last thing your new business needs is to get fined or taken to court because of an avoidable mistake.
In this article, we’ll share the legal elements that go into becoming a freelancer so you can start bringing in clients without unnecessary stress.
What Is A Freelancer?
Before you start setting up as a freelancer officially, it’s important to know exactly what ‘going freelance’ means.
Being ‘freelance’ means you work for yourself and you’re not employed by another business. You can have a contract with companies or work on limited projects for clients and customers, but you are your own boss and exist as an independent entity to the people you work for.
The biggest difference between being employed and working freelance is that you’re responsible for finding work and clients as well as managing and paying your taxes. So, instead of your tax being taken automatically through an employer’s payroll system, anyone self-employed needs to file a self-assessment tax return in April each year.
Many people choose to freelance because they feel there is greater earning potential or they want to pursue an individual passion. Whatever the reason for setting up as a freelancer, there are crucial steps to ensure compliance with legal requirements.
Register with HMRC
First things first. HMRC needs to know about all self-employed freelancers. It’s essential for new freelancers to do this early on, so you can be sure you won’t get questioned by the taxman in the future.
During this process, you’ll choose whether to set up as a sole trader or a limited company, which is a difficult decision in itself. But either way, you need to register officially and let HMRC know what you’re doing.
When you register that you’re self-employed, you’re also signing up to begin submitting your tax returns. An accountant or bookkeeper can help understand what this means.
Once you complete the form to register your self-employment and submit it online, it is just a matter of waiting for your Unique Taxpayer Reference code in the post.
This code allows access to the HMRC self-assessment portal where changes to a business can be registered and tax returns can be filed.
Paying Taxes On Time
Throughout the registration process, the basics of self-employment taxes are explained so you can make sure you understand your obligations.
A freelancer doesn’t pay tax monthly through a salary, so is responsible for filing a self-assessment tax return and ensuring any tax is paid.
It’s straightforward to use the HMRC self-assessment portal to manage taxes but many opt to use an accountant or tax expert to help manage this aspect of their business to avoid mistakes and make the most of allowances.
Tax owed will always be due for payment on the 31st of January following your self-assessment submission. So for the tax year April 2021- March 22, a tax bill will be due by the 31st of January 2023.
Understanding National Insurance
HMRC states that as a self-employed freelancer you may be required to pay two classes of national insurance. These are:
- Class 2 if your profits are £6475 a year or above
- Class 4 if your profits are £9501 a year or above
As of writing this article, those figures are calculated as:
- Class 2 at £3.05 a week
- Class 4 at 9% on profits between £9501 and £50000
This is paid within your tax bill as part of your self-assessment, so it’s important to get any figures correct to ensure the right class of national insurance is paid.
When in doubt, many freelancers choose to send a contract out. This offers protection in situations such as a working relationship breakdown or a change in the scope of work.
A contract is not a legal requirement but many choose to have one to ensure their interests are protected.
A contract is a legal document with clear terms that outlines expectations for two parties. If something goes wrong, you can seek legal support through the terms of your contract. Before you start using free contract templates online, consider having a legal expert look over them to ensure you’re protected.
Comply With GDPR
If you’re EU-based you’ve likely come across the latest GDPR compliance rules that forced businesses to ensure the privacy and security of personal data.
GDPR stands for General Data Protection Regulation, which is an act that was brought into force to keep customer data safe online, as that was previously an aspect of online business that didn’t see much regulation.
When setting up as a freelancer, legislation states that you must be complying with all GDPR guidance, otherwise you could face penalties of up to £20 million – or 4% of your annual turnover. Unfortunately, GDPR is a tripping point for many new freelancers because they don’t know exactly what this legislation requires them to do.
The simplest answer? Expert advice. A GDPR specialist can advise you on the best strategies, and avoid the stress and financial strain of a GDPR investigation or fine.
Get It Right First Time
Setting up as a freelancer is an exciting time, but understanding any legal obligations and requirements is important. Luckily in the UK, there are plenty of resources that offer guidance from local councils to the Prince’s Trust. HMRC itself has lots of information that will enable you to get up and running correctly.
But it may feel a little overwhelming at times – that’s where LegalDrop can help. We’re here to provide specialist support in all legal aspects of setting up your business. Get in touch to discuss your needs.