Freelancing is a very broad term for those who work independently for multiple clients, and as such, there’s, unfortunately, no clear-cut answer to whether or not you need to register as a company or not.
In this article, we take a closer look at when it may be appropriate (or a legal requirement) to register as a company and when it may be appropriate to take a different route.
What are the options?
When starting as a freelancer in the UK, you have several options; the two most common ones are operating as a sole trader or setting up a company. Each option provides different legal structures of employment and requires that you pay your taxes in different ways.
Register as a sole trader
When starting out as a freelancer, the simplest way to begin is by registering as a sole trader – the legal term for being self-employed. It’s a very straightforward process, and your application can be completed in no time at all through the relevant gov.uk website. This will allow you to pay income tax and national insurance, which can be worked out using the HMRC online calculator. You’re required to register if you’re earning over £1,000 a year – if your turnover is more than £85,000 a year, you also need to register for VAT.
Registering for VAT may also be beneficial (although not a legal requirement) if you turnover less than £85,000 but sell to other VAT-registered businesses and would like to be able to reclaim VAT. Registering as a sole trader requires little to no legal knowledge and shouldn’t prove to be a barrier to any freelancer!
Register as a Company
Once you’re set up as a freelancer and have a little experience, and are starting to have a higher turnover, it may be suitable to register as a Limited Company. It’s certainly more complicated than registering as a sole trader – you’ll probably need the help of an accountant to file taxes, and you’ll need to appoint directors, among other details.
The benefits are primarily financial. Your Limited Company will pay corporation tax, which is (at the time of writing) significantly lower than the higher rates of income tax. How you receive money from the company can happen in many ways, but you’ll generally end up making savings over being self-employed.
Registering as a Limited Company also provides you with certain protections that aren’t afforded to sole traders, primarily the protection of your personal assets should your company go into debt.
Which to choose?
At the end of the day, the deciding factor will be the size of your business. Once you start to operate on a larger scale, the protections and tax benefits of registering as a company will become worth the added hassle.
If you’re happy to remain small or only want to freelance as a side hustle, those added burdens won’t be worth it, and operating as a sole trader will be the more practical option!