Advice - General / Setting up a company

Some freelances set up limited companies that charge clients for their services and pay the freelance a salary (and dividends).

Doing this can be helpful in persuading clients, HMRC 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. HMRC has of course caught on to the possibilities, and introduced the "IR35" rules - which mean that companies can be charged Income Tax and National Insurance. 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) and:

the circumstances are such that, had the arrangements taken the form of a contract between the worker and the client, the worker would be regarded for the purposes of Parts I to V of the Contributions and Benefits Act as employed in employed earner's employment by the client. [Definition from National Insurance regulations]

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...

Operating as 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. Income Tax is payable only on the amount that the freelance needs to draw as salary - for example not to fall foul of Minimum Wage rules.

Those who operate as a company draw most of their income as dividends on their share-holding in their own company. From 6 April 2023 they pay no tax on the first £1000 of dividends. Assuming that their total income is more than their personal tax allowance, they then pay 8.75 per cent on the dividend payments - compared to the 20 per cent they pay on income taken as salary.

If their total income is over the £50,271 threshold for higher rate tax, they pay 33.75 per cent on dividend income above that - but they've likely engaged an acccountant or tax advisor and aren't reading this.

The company itself must pay Corporation Tax on retained profits. The current rate of Corporation Tax is 19 per cent (from 1 April 2023) on company profits up to £50,000. If your profits are between £50,001 and £250,000 you can claim "marginal relief" so that the effective rate gradually increases to 25 peer cent.

What does this mean? A financial journalist has estimated the net saving to someone earning £100,000 as about £3000. 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 an hour for simple book-keeping up to £400 an hour for a senior accountant. These thresholds beyond which freelances may make savings would be higher now.

Loans - a supposed company benefit that backfires

Some people have taken loans from their companies instead of income, in the hope of avoiding tax.

HMRC says that this is not mere tax avoidance but tax evasion - which is illegal. It says "that's clearly income - you are not going to repay it and you've evaded tax - and here's a huge tax bill." Loans outstanding for many years can all be taxed at once.

Tax campaigners have suggested that agencies have done this on behalf of freelances such as agency nurses without informed consent; but we had not heard of freelance journalists being affected. If you are a National Union of Journalists member who may be affected by this, please get in touch with the Freelance Office immediately, in strict confidence.

Limitations of limited liability

The "limited liability" that "incorporation" as a company provides is probably not of enormous use to a journalist. If things go very wrong, you may be able to wind up (or "liquidate") your company without suffering personal bankruptcy. This may be less painful. But it won't work if your personal finances are entangled with your company - for example if you as a person have guaranteed a loan to it.

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 on a libel lawsuit would be that it could need its own 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.