Mythbusting: When freelancing, you make more money and pay less tax.

Freelancing sounds like an exciting alternative to full-time employment. 

Whilst "freelancing" doesn't define any one way of working, it often conjures up an idea of a person working with multiple clients at once, on projects they're a deep specialist in, often on a schedule which they define, and no shortage of posts on LinkedIn suggest that working for yourself is a road to fewer hours, bigger paychecks and projects you're passionate about. There are also lots of doomsayers about freelancing - that there's no security, its isolating, its competitive, and you'll endlessly be chasing invoices.

In this series of articles, we're going to try and bust some of the myths around freelancing, so you're better prepared for what the reality is actually like. 

MYTH2:
You'll make way more money and pay less tax.

Let's unpack this in two ways: making more money and paying less tax.

Making more money.
As freelancing can apply to many different jobs and industries, it can be misleading to look at 'average' incomes for the self-employed, and there are many conflicting sources of data which show a wide ranges of incomes for the self-employed, especially as many are biased to show a positive picture, ie. recruitment or gig platforms.

A recent study by Quickbooks (of 5,000 independent workers) showed that the average salary in the UK of a self-employed worker is £33,000 per annum, and the average for those over 65 is £40,000. But TUC data from 2018 showed that 49% of self-employed workers were earning less than minimum wage. Government data from 2019-2020 (pre-pandemic), shows the most common incomes for the self-employed are between £10K-20K. This data doesn't reflect limited company owners, who pay themselves as employees.

What can be more accurate or useful is to look at sector specific reports, for instance, there are annual salary / day rate surveys in the creative industries produced by recruitment providers such as YunoJuno or The Indie List. But even within these, you're only seeing part of the picture. There's a massive variation accounting for level of seniority, the types of clients you'll be working with, and most critically, how hard your new business efforts are working. Your income is based upon how successful you are at finding work, not a passive income that you'll get by simply being self-employed.

It's also not fair to compare salary with employment. In employment, you're given an additional set of benefits including holiday time, sick leave, parental leave, paid bank holidays. You're also going to be required to pay for your own computer, administration costs, legal fees, software, internet, mobile phone, and things like training and even company travel. Whilst you might generate an income higher than your previous salary, your costs are also increasing.

Paying Less Tax.
And then there's tax. This will depend on how you're registered with HMRC, but for those registered as sole-traders, you're going to be paying exactly the same levels of tax as you did when employed. You'll still be paying Income Tax at the same rates - so there's no real difference to your tax payments, other than that you're now responsible for paying the tax man, rather than it being deducted at source. You'll also be paying National Insurance, which you were paying under PAYE, again at the same level, if your profits are over £6700.

The only difference here is that your taxable income is based upon your businesses profits - so any costs to your business, as we listed above, things like your computer, legal fees, software, internet, anything which is wholly for your business to operate, is deducted before you calculate your income tax. You're only taxed on the money you are taking home, not the turnover of your business. There's a brilliant guide to what tax and NI you'll be paying here.

If you're running a limited company or limited liability partnership, you'll also be paying corporation tax on your profits, which is generally 19% for companies in the UK, but will be increasing to between 19-25% in 2023. For companies with profits over £50,000, you'll be paying up to 25% additional tax. And if your turnover is in excess of £85,000 a year, you'll also be required to register for VAT. This means you charge your customers an additional 20%, but pay that VAT directly on to HMRC.

It gets complicated, and having an accountant to help you navigate this is always beneficial (which again is a new cost for your business to bear).

You could, of course, generate more income than perhaps you were on in your salaried role. The ability to charge a higher day rate than what you were effectively being paid in employment is absolutely possible - yet in reality, it's likely you won't be working every single working day, and will have periods of time without work. It's also possible to work very efficiently at a higher day rate and generate larger incomes than you'd previously experienced, but that can come with significant physical and emotional costs, including burnout or exhaustion.

Some freelancers do remarkably well, and generate higher incomes than in salaried employment - but it takes lots of hard work and focused effort, as it would in any form of work. If making more money is your goal, be clear on what your financial targets are, what your monthly income and costs will need to be, and how much time that will require of you - and remember, there are no guarantees of work at the rates you demand.

But don't just take our word for it! 

One of the most valuable things to do before going freelance is chatting with as many other freelancers as possible, to get their experiences of things. Join some freelance communities, find others in your sector, or use our AskAnythingpage to bust the myths for yourself too!