Moving to the UK to work as a freelancer is an exciting prospect. From the beautiful countryside views and sandy beaches to the magnificent heritage of ancient buildings, the UK is a great option for anyone looking to go freelance abroad.
- Freelancers in the UK
- Types of business structures for freelancers in the UK
- Becoming a freelancer in the UK
- Pros and cons of running a limited company freelance business in the UK
- Advantages of running a limited company freelance business in the UK
- Disadvantages of running a limited company freelance business in the UK
Freelancers in the UK
The number of freelancers in the UK has seen a sharp increase in recent years – thanks to the many benefits that it has to offer. Freelancers are a crucial part of the UK workforce and more and more people are looking into the idea of moving there to freelance.
Freelancers also choose to move to the UK because of its free quality health care and because, if you can speak English, you don’t need to learn a whole new language.
Types of business structures for freelancers in the UK
Starting your freelance business in the UK requires you firstly to have knowledge about the different business structures present there. This is because the structure that you choose for your freelance business will heavily influence the amount of tax you have to pay.
There are essentially four major types of business structures within the UK:
- Limited Company
- Sole Trader
- Limited Liability Partnership
Limited companies are businesses that legally exist in their own right and where the amount of liability undertaken by the company’s shareholders or members are limited.
Sole trader refers to companies run and owned by self-employed individuals and is the simplest and cheapest form of business to register. Sole traders are completely in charge of running their business and the legal requirements that come with it.
Partnership companies involve two or more people operating a business together and sharing income. A partnership entity is not separate from its operators and all partners are fully responsible for all debts owed by the business.
Limited Liability Partnership, or LLP, is similar to a partnership but here the liability of partners is limited to the amount of money they invest in the business. At least 2 partners are responsible for filing annual accounts.
The first structure – limited company – is what we want to focus on the most here as this is probably the best type of company for you to register your freelance business as. Keep in mind though that just like any other structure, running a limited company comes with its own advantages and disadvantages.
Becoming a freelancer in the UK
There are two types of Visa schemes that allow you to enter the country and work as a freelancer:
- Tier 1 Entrepreneur Visa
- Tier 1 (Exceptional Talent) Visa
Tier 1 Entrepreneur Visa is not strictly self-employment though you can use it to start your own business in the UK. This is especially recommended if you register your freelance business in the UK as a Limited Company. Keep in mind that you do need to have at least £50,000 in funding and a good level of English to obtain this Visa.
The other option for you is the Tier 1 (Exceptional Talent) Visa. This is a limited issue Visa that requires you to have an extensive application process showcasing your work as being of “outstanding quality” and one that has been published internationally.
#2 Registration for taxes
This is where the business structure you choose comes into play. Before going freelance in the UK, you’ll need to decide if you’re going to work as a sole trader or a limited company.
Once you do, you’ll need to register with HMRC (Her Majesty’s Revenue and Customs). This is an important step and quite an easy one because you can manage most of it online. Keep in mind that you will need a National Insurance number (NI) before registering. You can apply for this here.
💡 For more details on taxes, check out this extensive guide by Contractor Advice UK.
#3 Bank info
Opening a bank account in the UK is a relatively easier process now than it was a few years ago. All you will need are two documents – one that proves your identity and one that proves your address.
Most banks will accept your passport, driver’s license or identity card (for EU citizens) as proof of identity. For proof of identity, a recent utility bill or rental agreement will do. Keep in mind that the requirements vary from bank to bank so it’s worth contacting various banks before deciding on one.
Having health insurance is especially important if you’re a freelancer. Luckily, the UK provides free health insurance to both its citizens and expats.
There are also many global medical coverage options to choose from if you want to opt for private insurance instead.
Pros and cons of running a limited company freelance business in the UK
Advantages of running a limited company freelance business in the UK
There are a lot of advantages to running a limited company, some of which include:
#1 Tax and National Insurance Contributions (NICs)
As a Limited Company director, the majority of your income will be made up from dividends, which are subject to different tax than a regular salary. NICs are not payable on dividends, which ultimately means more money in your pocket.
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#2 Professional status and credibility
The standing of your freelance business will increase once you start working as a contractor and your clients may hold your business in high regard going forward. Having your own company with a corporate image also makes your business more credible.
Being Limited shows you’re serious about your career and you see a future in your chosen field. For some clients, this can equate to a higher level of confidence in you as a contractor and you may find yourself being hired more frequently as a direct result.
#3 Limited liability for the director
As your Limited Company is a separate legal entity in its own right, you’re protected by having limited liability. This means that should the worst happen, you’ll only be personally liable for your company’s debts to the extent of any shares you’ve paid for, and any unsecured loans made to the company.
#4 Ability to claim on a wider range of expenses
Being Limited means you’re entitled to claim more allowable business expenses. Also, as they are deducted only from your company’s profits (and you are only taxed on profits), if profits are reduced, so is your tax bill.
#5 Ability to split business income
When you have your own company, you have the option to transfer some shares to your spouse or one of your family members. Dividends are then payable directly from the company bank account to the shareholders in line with the share ratio.
#6 Option to defer some income into the future
When you operate through your own company, you are in charge of deciding what salary and dividends to pay and when to pay them. If you do defer some of your income, you have the option to draw this at a later time if you’ve only perhaps worked a bit that year and your income is lower than usual.
Deferring your income is also far more tax-efficient. When you draw it all out in one go, you pay higher tax than you would if you were to defer it.
Disadvantages of running a limited company freelance business in the UK
Unfortunately, there are also a few disadvantages you’ll need to keep in mind before you think about starting a limited company. These can be seen as below:
#1 Additional time and costs
Running your own limited company can result in you spending a bit more time on admin tasks and can be costly as well. For example, you will need to do your own bookkeeping and will be in charge of filing all the paperwork for the annual accounts, confirmation statement etc. Extra costs in the form of accountancy fees may also be inevitable when running a limited company.
#2 Increased responsibility
As a Limited Company contractor, you’ll have greater responsibilities than if you were contracting under an Umbrella or as a sole trader. It’s up to you to ensure you meet all your director’s responsibilities.
From following company rules to informing shareholders to filing tax returns, there are quite a few responsibilities on you as director. Even if you hire someone to help you with the business, you’re still legally responsible for your company’s records, changes, taxes, accounts, and performance.
#3 Possible IR35 costs
IR35 refers to the UK tax legislation designed to combat tax avoidance by employees working in the same way as full-time or part-time employees. Working through a limited company gives you a bit of an advantage when it comes to taxes and so the IR35 was introduced by the government to remove this advantage.
Providing freelance services n the UK via your own company could result in the IR35 legislation being applied to relevant work assignments. This would especially be the case if you have not taken any action to comply with these rules. The financial costs when subjected to IR35 are sizable.
To sum up, starting a limited company may not be the best step if you only plan to contract for a few months and then return to full-time employment. Doing so could prove to be more costly than it is beneficial.
Moving to the UK to work as a freelancer certainly sounds appealing. Would it be something you’d consider? Tell us in the comments down below!