2 Weeks Later

I’ve now been working as a freelance software developer for a couple of weeks. So far, it’s going OK. I have plenty of work – in fact there’s considerably more work than I could manage when you take TopCoder’s design and development projects into account (if you sign up please enter d000hg as referrer, and feel free to message me and say “hi”).

I’ve been looking this whole time into the legal ramifications of working as a full-time freelancer in the UK. I essentially have 2 options:

1. I can work as a “sole trader” which basically means I just do work, get paid, pay tax & National Insurance (I think that’s equivalent to social security in the US?) – it’s just like a normal job except I have to work out my tax returns each year.
2. I can set up my own “limited liability” company, and trade through that. That means creating a company, taking a salary, figuring out tax for both the company and myself as an individual, having a business bank account,…

I’ve picked 2). I’ve picked a name and am in the midst of getting my company incorporated. It might seem a lot more complicated, and it is. Although, actually becoming the owner of a bona fide  company is very easy, and cheap too. There are at least 3 reasons why it’s sensible for a freelancer:

1. As a sole trader, if you end up owing a lot of money then all your belongings and personal wealth are up for grabs. With a company, only the company funds can be taken if things go wrong – your house, car & personal savings are safe.
2. There are potentially quite large tax savings to be made. You can take a small salary and then take director’s dividends also, which basically means you take the same amount of money but pay less.
3. It looks a whole lot more professional if you own a company.

It’s too complicated to explain now how the tax savings are possible, and it’s only applicable to the UK, but if anyone’s interested post a comment and I’ll post some links or more information.

As I said, it’s a lot more complicated this way. In fact the vast majority of people hire an accountant and that’s what I plan to do. They can do pretty much everything, leaving you simply reporting your income and expenses and free to get on making money. An accountant shouldn’t cost more than the equivalent of 2-4 hours of what you charge per month, and I could easily spend that much time doing it badly!