Advice - General / Setting up a company
Some freelances set up limited companies that charge for their services and pay them a salary (and dividends).
Doing this can be helpful in persuading clients, the Inland Revenue and others that you should be paid gross, without deduction of Income Tax and National Insurance Contributions at source.
It is, however, definitely not decisive. HM Revenue and Customs have of course caught on to the possibilities and introduced the "IR35" rules - which mean that companies can be charged Income Tax. Whether you would be caught by IR35 is a complicated question. The rule is that it applies if you provide personal services (that is, the services of you personally - not what you are thinking) and:
the circumstances are such that, if you had provided the services directly to the client under a contract between you and the client, you would have been regarded for Income Tax purposes as an employee of the client and/or, for NICs purposes, as employed in employed earner's employment by the client. [sic]
It seems, anecdotally, that the people who are caught by IR35 are mainly those whose companies supply their services to one client for a period of months at a time.
Possible benefits of incorporation...
A company that is accepted by HM Revenue and Customs as a genuine provider of services to a wide variety of clients can offer tax advantages. Profits can stay with the company, with Income Tax payable only on the amount that the freelance needs to draw as salary.
The current rate of Corporation Tax is 19 per cent (from 1 April 2017, and still in June 2020) on all company profits.
What does this mean? An accountant estimates that someone earning £20,000 might save about £1500, but of course they would have to pay company registration fees and keep much more complicated accounts - for which an accountant would charge from £50 to £400 an hour. A financial journalist has estimated the net saving to someone earning £100,000 as about £3000. These thresholds beyond which freelances may make savings would be higher now.
Limitations of limited liability
The "limited liability" that "incorporation" as a company provides is probably not of enormous use to a journalist. True, if the bottom falls out of your market, winding up (or "liquidating") a company may be less painful than personal bankruptcy. But many of the large liabilities that journalists face - particularly the risk of being sued for defamation - are personal liabilities and the only effect of having a company would be that it could need legal representation as well.
You must take professional legal and accounting advice before embarking on setting up a company.
You may receive offers to set up a company for you, or see advertisements for schemes that have you selling your services through someone else's company. It is our journalistic judgement that these are designed solely to draw you into paying accountancy and administration charges. There are several websites that claim to offer support to freelance journalists but on closer inspection turn out to be lightly customised versions of generic templates for marketing such services. Some have the appearance of Multi-Level Marketing (MLM) schemes. Beware. Take independent professional advice.
Text © Mike Holderness & previous contributors; Moral rights asserted. The collection (database right) © National Union of Journalists. Comments to firstname.lastname@example.org please. You may find the glossary helpful.
The National Union of Journalists must not, can not and would not wish to dictate rates or terms of engagement to members or to editors. The information presented here is for guidance and as an aid to equitable negotiation only.
Suggestions apply to contracts governed by UK law only. In any event, nothing here should be construed as legal advice.