Back in April, for various reasons in my personal circumstances, I decided to give freelancing a go. I quit my permanent job, and set myself up as a sole trader. I wish I had done this from the very start, back when I was at university…
Being self employed allows you to try your hand at a number of different roles before you decide to settle on a specialization – if you specialize at all! From an employer’s perspective, they are getting a skilled individual who they can keep on or let go of easily; from your perspective, you have the freedom to take on a variety of projects and diversify your experience fairly fast.
Here’s what I’ve taken away from my experience so far:
- Sole traders have greater freedom than temp workers
- You can be a sole trader and be in education or full-time employment
- Tax is complicated
- Take customers with you
Freedom of a sole trader
One of the things I hadn’t understood about being a self-employed as a sole trader is that it was fundamentally different from temp workers: the two profiles are hired for differently, and have different tax implications.
For one, whereas temp workers are hired for basic to moderate skills in a field, sole traders as contractors are generally hired for more specialized skill sets. The upshot of this is that there’s also a tendency for temp workers to need to clock on and clock off as dictated by their employer. Contractors, however, have much greater control over their hours. Unless operational requirements constrain them (such as technical support delivery), contractors typically are given a project brief, and left to determine when and where they work to meet that goal.
This means that as a sole trader, you can still be in full time education (like university, but even conceivably high school if you have the skills!) or be an employee in another company – so long as you do not breach your employer’s contract (non-competition clauses in the contract, and you don’t carry out your contracting activities at your permanent employer’s offices) you should be fine to take on contracts for others.
In technical services, there’s a lot that can be done like this – implementing new business software deployments, delivering training, web design and custom programming can all be delivered at the pace of the contractor with the right skills – some of which command a high day rate. Determining your billable hours and calculating your hourly rate and day rate is an exercise to be undertaken early too.
Other things like content provision and transformation can be achieved in this way too – copy writing, photography, translation, etc also allow the contractor to work at their own pace: so long as the agreed deadline is met, the contract is honoured.
The additional consideration is that you are also free to attend conferences and summits when you want to, and put the costs on your business expenses…!
Sole trader and tax
To be a sole trader, you need to register with HMRC and obtain a Unique Taxpayer Reference (UTR). That’s it (though there are always more things to consider, that’s really the only main requirement).
You will now however need to start filing tax returns every year, your UTR will be required on occasional paperwork when signing contracts, and you will need to keep track of each and every expense – and be able to account for them.
To this end, you’ll need a separate bank account for spendings that are specifically related to your operation as a sole trader, and any pay-ins should go here as well. You can then transfer (“draw”) money from your trader account to your personal account as you see fit. Any expense made in the name of your trade (laptop, transport for a contract, paying another freelancer who worked for you) should go from your trader account, any expense that is personal (holiday travel, lunch, etc) should be from your personal account. This way you have a clear record of what was spent for business purposes and what clear income you made, and be able to easily determine your profit and loss when the tax return time comes round in April.
Due to certain quirks of legislation (IR35 being the most important), larger organisations offering contracts want to deal with limited companies. It may be too cumbersome to become a limited company yourself immediately (there are many considerations you need to take, and a lot of accounting, legal and administrative tasks), so umbrella companies exist to make this simple for you.
You become effectively an “employee” of the umbrella company, and it performs all the invoicing and tax duties for you. Organisations giving contracts are invoiced by your umbrella company at the advertised day rate, and take a percentage cut (typically 3-4%) on the transaction. The contract is also between the client organisation and the umbrella company, be sure that they send you a copy of each contract.
Otherwise, you can simply invoice your direct clients on your own – though make sure you provide the necessary information. There is invoicing software out there than can help too. Basically, you need to keep track of invoice numbers, and each invoice has to have your name and address on it.
Your first customers
Probably the hardest part, after accounting, is finding customers. You have to be a salesperson to an extent, and find the people who could be in need of your skills. You can search job boards for contracts to provides services, but proactively finding direct customers is also important for certain activities. How? If in your previous job you identified any customers who needed extra work done (that your employer did not already cover), you can approach them directly with your service offering.
If you do not have such experience yet, it’ll be a matter of cold calling. Depending on what your services and skills are, it may be relevant to do some volunteering work in other areas to build up personal relationships. Let them know what you do in contracting too – make no secret of it. You may find that people can recommend your hardworking self more readily. Even if they haven’t used your contractor services, they can at least provide you with a good character reference.
When I left my previous job, I was working nigh exclusively with multinationals whose customers were all foreign enterprises. The business I wanted to start was approaching small businesses locally, so I had a hard time. Getting individual contract jobs in the end was the only route I could pursue.
I am returning for the time being to permanent employment, as I realize there is much more I have yet to learn before I can be fully self-sufficient, but having realized the very free nature of working as a contractor and sole trader, I think I will keep this option forevermore open to me…