The easiest way to start IT freelancing? It’s as a sole trader
If you’ve decided it’s time to branch out on your own in the UK’s technology industry, and become an IT freelancer, then you can do so pretty much straight away as a sole trader.
Sole traders account for nearly two-thirds of all small businesses in the UK, so it’s a popular way to start your freelancing career, mainly because it’s so simple, writes Harry Gruffydd, limited company operations manager at Workwell.
Moreover, if you set up as a sole trader but then decide IT freelancing as a sole trader it isn’t for you, it’s easy to hop back into employment.
On the other hand, if you set up a limited company but then change your mind, you’ll have the hassle and costs of a formal wind-up process to deal with!
What is a sole trader?
Being a sole trader means you’re self-employed and the sole owner of your business. It’s a solution that appeals to many permies who want to try freelancing, especially initially, because it’s straightforward, quick to implement, and inexpensive.
Unlike forming a limited company -- which we’ll explore shortly exclusively for Free-Work, there are no set-up costs for sole trading, and you simply inform HMRC that you’ve started self-employment.
Once you’ve landed an assignment or contract, you can get straight to the work, invoice your client(s), and then you pay your tax by January 31st of the following year, via a self-assessment tax return.
Paying tax as a sole trader
Paying tax is relatively straightforward as a sole trader.
You’ll need to calculate your income minus your expenses, and then file a self-assessment tax return by January 31st each year.
Then, your largest single task is to keep accurate records of your income and expenditure and make sure you file your tax return accurately and on time with HMRC.
Key reliefs you’ll get as a sole trader…
You can claim tax relief on legitimate business expenses such as travel, marketing, training and helpfully for new IT freelancers, equipment as well!
If you’d like to know more, HMRC has produced a list of allowable expenses here. Further positively, you can also get tax relief on personal pension contributions either by paying as much as 100% of your net profits into a pension, or up to £60,000 a year, whichever is lower.
Sole trading as a tech business? It’s less complicated than ‘LTD’…
Conversely, if you set up a limited company to operate as a technology consultancy, you’d have to file annual reports to Companies House, plus you’d have to calculate and pay corporation tax. In addition, you’d still have to file a self-assessment tax return to account for tax owed on money you take out of your new tech business, in the form of salary and/or dividends.
There are of course advantages to setting up a limited company, such as limited liability and tax efficiency. But most people who incorporate their business (as a sole trader your business is unincorporated), then prefer to have the support of a good contractor accountant -- to optimise tax-efficiency and operate compliantly.
Managing your finances
As a sole trader, it’s not required but it’s a good idea to set up a business bank account so that you keep your business and personal finances separate. This makes it easier to calculate your profit, and simpler to keep track of your business’ finances.
Remember, you’ll need to ensure all your clients have paid their invoices, and you’ll need to calculate costs associated with running your business. But again, it’s much easier to do this if your business finances are not mixed in with your personal bank account.
Some sole traders like to use online accounting software like FreeAgent, Xero or QuickBooks.
Others regard the monthly subscription fee as an unnecessary expense, because their finances are very simple. So, if your new sole trader technology business is intending to issue only a low number of invoices, and will have very few expenses to track, then you could potentially operate without such software, and still succeed.
Disadvantages of being a sole trader
The downsides of operating as a sole trader include personally liability for business debts. This is because there is no distinction between personal and business assets when you’re a sole trader, meaning valuables such as your home or car could be at risk if you cannot pay your debts.
As a result, it’s important to take advice about insurance which may give you both protection and peace of mind. Typically, professional indemnity cover should be considered alongside public liability insurance, which protects you from claims from other people.
Also, sole traders are generally not engaged by recruitment agencies due to tax risks, so if you plan to rely on recruiters to source opportunities for your sole trader business, you might need to think again. The best thing is to ask the agency upfront whether they are prepared to source work for you.
So will YOU be a sole trader to start tech freelancing?
Though there are downsides to sole trading -- the sole trader structure is less tax-efficient than a limited company, for example, for many IT freelancers the benefits of the simplicity of operating as a sole trader outweigh the risks. However, before deciding which working option is best for you, take tailored advice.
Limited Company Operations Manager at Workwell
Harry leads Workwell’s team of specialist contractor accountants. He has worked in the industry for over 15 years and is an expert in tax and compliance matters for freelancers and contractors.