Category Archives for Self-employment

Deciding what to charge clients – Part 1

How did you come up with your current fee structure? Perhaps you looked at what your competitors were charging?  Maybe you’re basing it on what you used to earn as an employee. Either way, those methods are unlikely to reflect the realities of your business.

In this post, I’ll help you work out your true running costs and the minimum you need to charge. In parts 2 and 3 of this series, we’ll consider how you can increase your income by demonstrating value to your clients.

What are your fixed costs?

First, you need to work out your essential outgoings –  the money that pings out of your account each month. Depending on what your business does and where you do it, these might include:

  • Office space
  • Business rates
  • Utilities
  • Insurance
  • Phone
  • Accountancy
  • Banking fees

If you’re a company director,  you probably pay yourself a small salary and hopefully make pension contributions, too. It’s good to treat yourself like an employee and prioritise these costs each month. After all how much loyalty could you expect from an employee if you didn’t pay them?

Here are my figures to give you an idea:

Outline of my fixed costs

So, I need a turnover of £1,697.27 each month just to cover my fixed costs. And to reiterate, I’m including myself in those fixed costs. If I can’t afford to pay myself, it’s not really a business.

What are your variable costs?

The last exercise was quite straightforward.  It gets trickier when we address our variable costs. These might include:

  • Travel
  • Stationery
  • Marketing
  • Professional support or outsourcing
  • Subsistence
  • Training

These costs can vary from month to month and often they’re sporadic. The easiest way to calculate them is to go through bank or credit card statements for the last two years. Work out the annual total for these categories, then divide by twelve to get an approximate monthly figure. Here are my figures:

Outline of my variable costs

Added to my fixed costs, this is a total of £2,052.27. Although I could get by on £1,697.27, I need to invest in myself and my business to keep it viable. Therefore, my minimum monthly turnover is £2,052.27.

How much paid work can you do?

One of the major challenges of self-employment is that you have to do everything –  marketing sales admin bookkeeping – at least until you can afford to outsource it. This drastically reduces your billable hours.

In my case, I work 6 days a week. This is how it typically breaks down:

Marketing – 2 days
Admin and accounts – 0.5 days
Actual paid work – 3.5 days

That adds up to 14 paid days each month. So, I need to earn a minimum of £2,052.27 over 14 days –  that’s £146 per billable day.

Your work patterns will be different, especially if you have caring responsibilities, but you should be able to use this approach to arrive at a minimum figure for you.

How does that compare with what you’re actually charging at the moment?

Remember, this is the minimum. I’m guessing you started a business so that you could earn a decent living. In my next post, I’ll explain how you can determine a realistic income and reflect this in your prices.

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Sole Trader or Limited Company?

It’s surprisingly easy to set up a limited company. When I registered my business around 7 years ago, I was astonished to see all the paperwork in my inbox about 15 minutes later. The fact that it’s so quick and easy means that sometimes people create companies without really considering what’s right for them. In this post, I’ll outline the differences between operating as a limited company and sole trader, explaining the advantages and disadvantages of both.

Sole trader

Most freelancers start off as a sole trader. You simply notify the Inland Revenue that you are now self-employed, and you’re ready to go. The accounting requirements are very straightforward: you’re taxed on profits through your annual self-assessment return. Your profit is income minus allowable expenses. ‘Allowable’ means those expenses have to be purely for business purposes. So you can’t claim for cat grooming or biscuits.

If your tax bill is greater than £1,000, you have to make payments on account by the 31st of July each year. This means you make two tax payments –  one in advance, one in arrears.

There is no legal difference between you and your business, and you are liable for any business debts. Although it’s not advisable, you could use the same bank account for your business and personal transactions. There’s no need to report your individual transactions, only your income, expenses, and profit. It is good practice, though, to record all your business transactions – income and outgoings – and to save relevant receipts.

Limited company

A limited company exists completely separately from you. You transact business as a corporation rather than as an individual. The main advantage is that your personal assets are protected. If your company closes or experiences difficulties, your personal assets cannot be taken to cover any liabilities.

As you can see, this offers significant protection for you. However, it also comes with significant responsibilities. You have to operate your company within the law. This includes:

  • Maintaining a separate business bank account
  • Recording every transaction
  • Filing annual returns and accounts with Companies House each year
  • Notifying Companies House of any major changes to your business
  • Paying all relevant taxes

When you create a limited company, you become a shareholder and a director of a company. Any company profits are currently taxed at 19% through corporation tax. You have to report this on a CT600 form at the end of your financial year. As a director, you can pay yourself a salary, which counts as a business expense and is therefore tax-deductible. You can then pay yourself dividends from the profits. These dividends, along with your salary, must be reported through your personal tax self-assessment form and any tax liabilities paid.

Company directors can’t just dip into the business bank account. You can only withdraw money as salary, dividends, or a director’s loan – all of which have tax implications and must be reported.

Advantages of being a sole trader

  • There’s much less paperwork. You’re not legally obliged to file anything other than your annual personal tax self-assessment return.
  • Your accounts are much simpler. As I mentioned earlier, you need only report your income, expenses, and profit. There’s no need to break them down.
  • It’s cheaper. Although the costs of setting up a limited company are modest, you’ll almost certainly need to hire an accountant to help you with the annual accounts and returns. This usually costs a minimum of £500.
  • You can protect your privacy. As a company director, your name, age, and address are a matter of public record. Your company accounts are also available for anyone to view.

Advantages of being a limited company

  • You can generally claim a wider range of business expenses. It’s a good idea to hire an accountant to explain exactly what’s allowable in your circumstances.
  • Limited companies are often more tax efficient. Again, you’d need an accountant to advise on the best payment structure for you.
  • You can borrow money as a company. This could be useful if you have a poor personal credit rating but need additional funds to grow your business.
  • Some large corporations prefer dealing with limited companies. If you have big clients, they might feel safer dealing with you as a company rather than as a sole trader. The fact that your business is carefully scrutinized lends you credibility.

Whichever route you take, you need to be careful of the IR35 rules. These are designed to prevent permanent employees from disguising themselves as self-employed or limited companies to take advantage of the tax benefits. You are vulnerable to an IR35 investigation if you have only one client, especially if you are based at their premises. You can check your employment status on the HMRC website.

Conclusion

In short, a limited company gives you more protection but involves more responsibility. As a sole trader, you can enjoy lower costs and greater flexibility, but you cannot operate separately from your business. It’s especially important to ensure you have appropriate insurance cover for your business. You can change your business status at any time, although it’s much easier to go from sole trader to limited company than the other way around. Think carefully before creating a limited company, even though it’s seductively quick and easy to do.

For tips, tools, and resources on self-employment, please sign up for my monthly newsletter.

This post is for information only and does not constitute advice.

Image © Andrey Popov – stock.adobe.com

Discussing Fees with Clients

There’s nothing more awkward than having the money conversation with clients. Generating ideas is exciting, building relationships exhilarating, but talking terms often feels grubby. Yet if we don’t agree numbers early on, we can waste time discussing projects that aren’t financially feasible. In this post, I’ll share three tips on discussing money with clients.

1 Make your prices visible

You can’t assume your potential client has done any homework on likely costs. Years ago, when I was a web developer, I spent ages putting together a proposal for an e-commerce website, only to discover that the business owner had a budget of £20. Yes, just one zero. Even if your quotes vary enormously, a range will give a sense of the cost. You could outline a typical scenario with the likely fee. This at least provides an anchor point. Otherwise, unhelpful assumptions can arise.

Not advertising your prices could also make potential customers imagine you’re too expensive for them – especially if you have swish branding and a slick web presence. They won’t necessarily call or email to find out.

2. Have the money conversation early

Get the numbers out of the way. This is especially important if you’re in a ‘caring’ role, such as a coach or therapist. Potential clients know you want to help them, so can sometimes think you’re prepared to do so on a voluntary basis. Explain at the beginning, “this is how I work, this is what I charge …” Then you can talk more about the client’s project or challenges and conclude by emphasising your value, rather than your hourly rate.

3. Don’t haggle

As I said in the previous tip, you need to be clear on your value, i.e the difference you’ll make to this person or company. It’s not up to you to be affordable – your potential client needs to decide whether the problem you’re solving is a priority for them. Perhaps they are keen to get their logo redesigned, but a new laptop is more urgent this month. They’ll be back once they’ve got the money. Accepting a lower fee means you feel resentful, and it sets an unhelpful precedent. If you start low, it’s hard to charge more in future.

You’re working hard, so you deserve to:

  • Earn a decent income
  • Invest in personal and professional development
  • Get recognition for your skills & experience

In my next post, I’ll help you work out how much to charge.

For tips, tools, and resources on self-employment, please sign up for my monthly newsletter.

Image © Talaj – stock.adobe.com