Today there are some 1.9 million freelancers in the UK – they represent a flexible resource all keen to work for themselves and it is no surprise that even more people are taking the plunge and setting up on their own.
But 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 that has helped Dave Chaplin, CEO and founder of ContractorCalculator to attract over 100,000 visitors, all freelancers and contractors, to his web site each month.
Here he looks at money matters for anyone thinking of going freelance and offers some advice.
Can you afford to go freelance?
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 will 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 take another thirty days. So be prepared and have some savings to help tide you over for the first few months.
Find a trusted adviser
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.
Setting up as a limited company
Creating and running a limited company may seem daunting but it does not have to be onerous and can be quick, inexpensive and easy. The limited company is an organisation that is called a ‘moral person’ in law.
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 Companies House keeps this list.
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 as a freelancer or contractor 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.
Negotiating a mortgage
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 3-5 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 also 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.
Go for it
Whilst we might be in times of uncertainty following Britain’s decision to leave the EU this will present opportunities for freelancers and contractors. Companies, which might not be keen to take on permanent staff, will turn to freelancers for support as they provide a low risk alternative to employees in uncertain times.
So, if you are thinking of making the move now is as good a time as any.
About the Author:
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 2004.