How to: make tax less taxing for freelancers

The business model for news production is changing. More and more permanent jobs are being shed in local and regional media and the industry is creating an ever-expanding pool of freelance journalists.

This is leading to greater pressures on journalists to find work. Coupled with the culture of relentless deadlines that exist to feed the public’s appetite for 24-hour news, freelance journalists have ever-increasing time constraints so do not always have the desire or resources to keep track of their finances, VAT, tax and National Insurance (NI).

In this article, Derek Kelly, managing director of ClearSky Accounting, a specialist accountancy firm for contractors and freelancers, lays out the financial signposts for freelancers.

Limited, not limiting
Traditionally, the majority of freelance journalists have worked through their own limited company, because the tax advantages of working this way far outweighed any other method.

A limited company is a corporate structure created to handle the tax and business accountancy affairs of one freelancer and is self-administered with the assistance of a third-party accountant. Given the specific and complex nature of accounting required by freelancers, you could consider using a specialist accountant, rather than a high-street service provider. This option provides not only a tailored service, but it also offers assurance to any journalist dealing with experts whose job it is to navigate the tricky waters of tax, compliance and all things related to Her Majesty's Revenue & Customs (HMRC).

But regardless of what route a journalist thinks best for his or her career path, they need the facts to steer a prudent course.

Tax is taxing
This is because it comes in many disguises. Having been in the business for 18 years, I know only too well that freelancers can easily get bogged down with all the ins and outs of VAT, income tax and PAYE tables. However, a freelancer should have an overview of the whole tax situation and be able to delve a little deeper into the subject. This puts them in the driving seat so they know what to look for when retaining an accountant and how much to pay the taxman and when.

VAT
VAT is a 'sales' tax that is controlled and collected by the HMRC. Freelancers who work through a limited company and expect to turn over more than £68,000 per annum should register for VAT. VAT can be calculated (and repaid) on a cash or accruals basis - i.e. based on when VAT is received from invoices, or based on invoices sent during the VAT quarter for which payment has not yet been received. Freelancers can also opt for the flat rate scheme, which can save time and be financially beneficial. An accountant should be sought to advise which method is best for individual circumstances.

Income tax
Freelancers are liable to pay income tax on all money received. Freelancers operating through a limited company will have the option of paying themselves a salary or taking dividends out of the profits. If a salary is paid, PAYE tax and National Insurance must be deducted and paid over to HMRC.

Freelancers who reach the higher rate (40 per cent) tax band with their combined income from the company will have to fill out a self-assessment form for income received in each tax year. The HMRC uses the details on this form to calculate whether any additional tax is due. Any tax owed is payable by 31 January of the following year.

Most freelancers pay an accountant to fill out their self-assessment form. The normal charge for this is £50 to £150 per year depending on the complexity of the financial affairs. Accountants, such as my own, ClearSky, include this within the monthly fee.

Professional insurance
Freelance journalists, as part of their daily work, provide a professional service that is relied upon by their clients. This means that if mistakes are made, or the freelancer is deemed to have been professionally negligent, they have a direct financial responsibility to their client for any errors and may be liable for compensation. An example would be if a freelancer left a briefcase by their desk that someone tripped over; the freelancer could face a claim against their business under public liability.

Many clients and agencies now insist on evidence of freelancers having professional indemnity insurance; having this protection proves to clients that the freelancer is professional and responsible in their approach and it can help in securing future work.

Freelancers may also want to consider taking out their own health insurance and sickness cover, because a long stretch of illness could mean no income. Policies range in scope and terms and therefore also in cost. Freelancers should consider how long they could financially exist whilst not working and seek a policy that pays sickness benefits after that period of time has elapsed.

Many freelancers work from home but it cannot be assumed that a normal household insurance will be enough to cover any business assets. In any case, it will certainly not usually cover business risks but it is possible to obtain special 'working from home' policies.

'P' is for...?
P60 is a statement of how much PAYE tax and National Insurance has been paid by the freelance journalist during the year. This is issued by the employer at the end of the tax year. Freelancers running their own limited company will be a director and, regardless of income, must complete another P, this one is a P11D, which is a return of expenses' payments and benefits form every year.

A P45 completes the three Ps and is a statement of earnings and tax payments from a previous employer; it is needed to ensure freelancers are on the correct tax code when freelancers change jobs. If no P45 is available, then a P46 can be issued to receive a full code from the tax authorities.

Time to retire?
Pensions have long been the most efficient way of reducing tax and NI liabilities. For example, pension contributions of £6,000 per annum would result in a tax saving of £2,400 for the higher rate taxpayer (assuming a 40 per cent higher tax band).

For freelance journalists affected by IR35, there are significant benefits to investing in a pension as it will reduce the overall national insurance and PAYE liability. There are a wide variety of pension schemes available, so it is essential to get independent advice as this could offer substantial savings. It is advisable to always consult an Independent Financial Adviser (IFA) before committing to anything.

Pensions are an important part of retirement planning and should be reviewed annually, they also serve as tax planning opportunities.

Claimable expenses
Aside from any expenses that are incurred on client-related project work that can be charged to that client, general business expenses can also be legitimately claimed. This has the effect of reducing any tax and NI liabilities.

For those freelancers using a limited company falling within IR35 legislation, there is a five per cent general allowance for expenses. Freelancers can also still claim 'Schedule E' expenses, such as subsistence and mileage payments. Whilst possible, it is not common practice for the limited company to have a dispensation, therefore freelancers must keep all receipts and ensure a P11D (tax statement of expenses and benefits) is completed each tax year.

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