All about being freelance

I am currently between PR jobs and have been offered some freelance work – what are the implications of working freelance?

By Chris Cooke

There are both advantages and disadvantages to working as a freelancer. Some people like the advantages so much they choose to work as a freelancer on a permanent basis. Others only choose to work freelance in order to get a ‘way in’ to a certain industry or company, or to fill a gap between two full time roles.

As a freelancer you essentially work for yourself – the person who hires your services is a client rather than your boss. For them, you are a supplier rather than an employee. Some freelancers are based at their clients’ offices, work normal offices hours and sit alongside full-time employees, and as a result, on a day to day basis, their freelance status isn’t obvious. However there are a number of legal differences between employees and freelancers.

Dis-advantages

First, it is generally easier for companies to get rid of freelancers. When a company no longer requires the services of a freelancer, for whatever reason, they can just terminate their supplier contract. The freelancer enjoys few of the benefits that a full-time employee gets under law – in particular regarding job security. Indeed the reason companies often take on freelancers rather than employees is because they have a temporary increase in workload. By taking on someone on a freelance basis the company can use their services while workload is high, and quickly end their contract once things are back to normal. So, freelancers are only ever assured work, and therefore an income, in the short term.

Second, a number of ‘liabilities’ normally taken on by an employer, sit with the freelancer when they are hired in that capacity. This is most relevant in terms of sickness and compassionate leave. As a freelancer you have no automatic rights to sick pay, or time off for funerals or family illness, and when you take days off for this reason in theory you won’t be paid. Which means that coming down with the flu for a week suddenly becomes quite expensive. This may also apply if a company shuts down over Christmas – what for employees might be a two week free holiday, for a freelancer can be ten days less income.

Third, as a freelancer rather than an employee you will be asked to invoice and will be paid like other suppliers, rather than receiving a monthly pay packet at the same time as all the other employees at the company. If you are freelancing for a good company this may not make much difference, except you may be paid on a different day of the month from everyone else. However, whereas most companies will meet their payroll obligations without fail, supplier payments may sometimes be delayed for cash flow reasons. Plus, when it comes to your first payment, if you bill at the end of your first month of work, but the company has a policy of paying invoices only after 28 days, you might not see your first lump of cash until two months after you joined the company.

And then there’s the tax. Whereas employers pay the income tax and national insurance contributions that their employees owe the taxman, so that workers never have to worry about such things, that is not the case for freelancers. You yourself have to pay national insurance contributions and income tax on your earnings directly to the Inland Revenue – meaning that at least a quarter (depending on how much you’re billing over all – it could be quite a bit more) of what you bill to your client will have to be passed onto the taxman at some point (freelancers normally pay NI monthly and income tax in an annual lump sum).

Aside from the challenge of remembering not to spend all the money you earn, only to be presented with a big tax bill at the end of the year, this also means you will have to register with the Inland Revenue as being self-employed and provide an annual tax return in which you declare your earnings (check here for info). A tax return isn’t as daunting as it probably sounds, and you don’t need to be an accountant to fill it out, though a lot of freelancers do pay an accountant to do it for them – which will normally set you back a few hundred quid.

Advantages

So, you have no job security, don’t earn when you’re ill and have to do your own tax return. What, exactly, are the benefits of being freelance?

Well, depending on your agreement with the company you freelance for, normally you have more freedom. It’s more common for freelancers to work at home, to work their own hours, and to take impromptu days off that it is for employees. Freelancers can also normally work for multiple companies at the same time – providing there are enough hours in the day – so a freelance career can offer more variety too.

And there are financial benefits as well. Freelancers normally charge a higher hourly rate than employees doing the same job. Not only that, but freelancers might get away with paying less tax because they can deduct ‘business expenses’ from the money they earn before tax is calculated (and because tax is a percentage rate, that means less tax to pay overall).

‘Business expenses’ means any money you spend securing or doing your freelance work (so printing business cards, buying stationery or a new laptop for work purposes, or travelling to meetings). There are obviously rules about what you can and cannot include here, which is another reason many freelancers use an accountant to do their tax return – where these expenses are declared – because they know what you can and cannot claim. Even if you do hand all this over to a specialist, you do need to remember to keep a receipt for everything you buy which could be set off against tax.

So, to conclude: less job security and more liability, but possibly more freedom and more short-term money – which would you prefer?

One last point

Because of the potential tax benefits enjoyed by freelancers, and the reduced liability for companies who use their services (instead of hiring employees), sometimes a firm might hire a freelancer to do what is basically a full time job – the would-be employee agrees to forego some of the security that comes with employment because of the tax breaks. Be warned though, the Inland Revenue doesn’t like this, and can force companies to convert full time freelancers into employees. As a general rule freelancers should only be hired because a certain skill or general manpower is needed for a short-term project, not as an alternative to properly employing a workforce. Should a freelance contract you’re being offered sound like a quasi-full time job, then it might be worth getting advice from a lawyer or accountant as to what the tax man might say.