When I went full-time freelance in 2018, I was taking a huge leap into the unknown.
I had identified a gap where my skills and experience could open doors for a successful future. But what I didn’t have any awareness of was actually running a business.
Over the past five years, and mostly thanks to the help of Gold Stag Accounts, I’ve become rather clued up on what to spend, when to spend it, and how to run my freelance business in the max tax-friendly manner.
What I wish I knew before I went freelance was exactly how much it costs to set up a freelance business.
Spoiler alert: it’s not a lot.
Double spoiler alert: everyone gets it wrong.
In this blog post, I’m going to run through the five major things you’ll spend money on when setting up your freelance business for the first time. We’ll keep a running total as we go.
It would be an easy way out to say that there could be zero costs to set up a freelance business. There’s nothing stopping you from just writing a blog article and sending an invoice you made on Excel.
But when you hit a threshold of earnings, when you get an unmanageable number of clients, or when you run out of customers and need to find new ones, it’s time to spend a little money.
1 - Register as a Limited Company
Becoming a Limited Company provides two main benefits:
- You protect yourself from liability. I.e. your company is responsible for any things that might happen, not you as a person.
- You open the door to long-term tax benefits when you earn roughly £30,000 or more.
“For tax saving reasons, it usually makes sense to go Ltd once your profits exceed £30,000 and other than the tax savings that can be made, you can also increase your cash flow as you don't have to make the large payments on account you would as operating as a sole trader.”
- Martin Brooks, Gold Stag Accounts.
According to gov.uk, it costs £12 to register as a Limited Company and you can pay by debit or credit card. Your company is usually registered within 24 hours. If you do not want to use 'limited' in your company name you must register by post.
Total cost to set up as a freelance business: £12
2 - Build a website
Let me start by saying you don’t have to build a website. I went through the first few years of my freelance life without one. I was able to rely on LinkedIn and client referrals for the bulk of my business.
However, over time, it made sense to have more ways to generate leads, somewhere to showcase my portfolio, and most importantly, show my pricing in public.
Why would I do such a thing?
To filter out the time wasters.
💭 If people know how much your services cost, only the people willing to spend the money will book a call or start an email exchange with you.
My website cost the equivalent of £5,000. That’s because I lack the skills to design a good website. It’s also because I went to someone proven and with a remarkable reputation.
After all, I wanted to showcase that I create high-quality content. So it makes no sense to have a terrible website that suggests the opposite.
You don’t need to spend that much money. I’ve since hired someone for less and even swapped my content writing services with those of a web designer. I wrote three blog posts in exchange for a new site.
If you have the skills yourself, you’re laughing. As a reference point, I’ll add an average of £1,000 to get set up.
Total cost to set up as a freelance business: £1,012.
3 - Marketing and advertising
In my first year as a full-time freelancer, I didn’t spend anything on marketing or advertising.
I then saw myself potentially running out of customers so invested in it. This is a decision that paid off magnificently.
The majority of my work still enters my inbox through word of mouth referrals and LinkedIn, but every now and again I run some Google Ads for my book or sponsor a golf day for telecoms partners.
You might also consider paying another freelancer for web marketing services or joining communities where you might find work.
Any marketing activity you do is tax-deductible, so think of this as an investment rather than an expense.
Total cost to set up as a freelance business: £1,300.
4 - Invoicing and accounting
I’m very good at maths but balancing accounting and creating content is not something I excel at.
Hiring an accountant was a no-brainer for me. Especially when I realised that for one flat fee, I would get all my accounting software, my self-assessment, my end of year accounts, and my payroll all included.
I also get a snapshot view to make sure everything is as it should be. As a result, I’ve become more aware of the money I’m spending (or not spending) and making small changes.
For about the price of about one blog post, I get everything sorted for me. All I do is send the invoices when I get work and make sure I don’t let my approvals spiral out of control.
Total cost to set up as a freelance business: £2,500
5 - All the things
In my book, The Autonomous Freelancer, I include a section called What happens when you get paid?
I’ve included the entire section here as it’s important to understand what you can claim as a business expense—there’s more than you realise. But it’s also important to be aware of all the things you could potentially spend money on when you set up a freelance business.
When you’re a freelancer, you’re not just responsible for your deliverables and sales, you’re also responsible for your payroll.
People usually react to these things in two ways.
They either think this is great because they get all the money and spend little on outgoings. Or they fear messing up because numbers are alien to them. I also hear horror stories (to me at least) about people spending entire days working on payroll and accounts.
The notion that someone is doing this fries my mind. I estimate I spend ten minutes per week on my finances.
I split my finance tasks into two segments: when I get paid and when I spend money.
Here’s my exact process when I receive payment from a client:
- Money comes into business bank account
- Move 43% of that amount to my Tax Pot
This way, I know that my balance is my genuine spendable business income. The tax pot is exactly that.
In reality, I don’t pay 43%. That is, however, the amount I was paying when I was employed. So, as a backstop and a nice bonus, I move 43% to the tax pot so I’m covered for all eventualities.
When tax-paying season comes around, I make a single payment safe in the knowledge that it’s all available. Whatever’s left in the tax pot after I’ve paid tax can either stay there as a buffer or be moved to the main balance.
That’s it. I’ll match up money with relevant invoices by clicking “approve” when I log into my accounting software every few weeks or so. That keeps my accountant happy.
There are some circumstances when I move money back from the tax pot:
- Salary
- Pension
- Expenses
Each month, pay your own salary. Make it the bare minimum for tax efficiency. In the UK, this is £758.33 (as of August 2023).
By doing this, your company is paying you a salary small enough not to be taxed in your personal self-assessment. On paper, this doesn’t sound liveable. And it’s not. So let’s become tax-efficient…
Being savvy with your expenses and knowing what you can claim as a legitimate business expense pays for itself here.
These include:
- Working from home expenses (heating, electricity, furniture)
- Travel and hotel costs
- Entertaining expenses
- Mileage, petrol, and vehicles
These are all pretty standard guidelines. But, until you learn exactly what you can spend (and claim as a tax-deductible expense), it’s just words on a page.
Here’s what you can (and should) claim as a business expense. Note, these are applicable in the UK for limited companies. Always check with your/an accountant first.
- Accounting: you can claim for your own time spent on accounting if you don’t have an accountant. If you do have an accountant, you can claim for their fee.
- Advertising & marketing: if you run a campaign to generate new leads, you can claim for the cost of the platform and resources you use.
- Business account payments: if you have to pay a fee for your business bank account, or need to pay interest, you can claim for this.
- Broadband/internet: claim back the percentage of your home broadband bill you use for business. E.g. if you work 8 hours a day, claim for 33% of your broadband bills.
- Business use of home: as above, claim the 33% of your heating, electricity, gas, logs if you work 8 hours per day.
- Charity donations: any donation using Gift Aid is applicable for tax relief.
- Computer equipment: this covers a wide variety of things you will likely use in your business and personal life. Laptops, printers, cables, chargers, etc. are all covered in this category. The same applies to software and subscriptions used for business.
- Equipment your company buys from you as a person: (taken from Freeagent’s “Business Costs Expenses for Limited Companies Guide”): If you already own a computer, office chair etc and want to bring it into your business, you can claim tax relief for its market value at the point you brought it into the business. Check eBay for similar items and then include that cost in the company’s accounts. Don’t forget that if you are going to carry on using the equipment privately too, HMRC would consider this to be a taxable benefit.
- Travel: if you need to fly, drive, cab, train, or something more inventive to see a client or attend a business function, you can claim the full amount of this. The same applies to where you are staying. Check your local rules on claiming fuel for mileage if you drive. If you have a company car, even as the sole employee, all mileage is included as the vehicle is a company asset.
- Company car: if you have a company car, everything associated with this vehicle is a business expense, with the exception of parking and speeding fines.
- Food while traveling: in the above situations when you’re traveling, you can claim for food away from your office. These will match up with your dates for other travel expenses.
- Swag: if you create merchandise with your name on it to send to prospects and customers, you can claim for this.
- Mobile phone: switch your mobile phone contract to a business account in your business name and you can claim the full amount as a business expense.
- Pension contributions: you can claim the full amount of every pension contribution. More on pensions in the next section.
- Stationery: any pens, notepads, etc. can be claimed as a business expense.
- Training: if you sign up for courses or resources to be used exclusively for business purposes, you can claim the full amount of these.
I suggest you take a photo of the section above and stick it to your cork board above your workstation ready for when you do your accounts. Every element here contributes to a much nicer tax bill at the end of the year and helps reduce the burden on your personal salary.
In the likely event that you are still lacking funds in your personal bank account, there are scenarios where you can make tax-free transfers from your business account to your personal account.
These include things like taking dividends from your company. Here, check with local rules. In the UK in 2023, this is capped at £1,000. In 2024, it is being reduced to £500.
If you’re desperate for cash from your business account, consider taking a director’s loan. Here, you can take a tax-free loan from your business on the basis that you must pay it back.
Outside of these tax efficiencies, it’s time to start paying tax. However, running a company means you pay tax for the company and on your reduced “earnings” you withdraw from it. This is a far more efficient way to be a freelancer than working as a sole trader.
There is a small caveat that this is only effective at a certain threshold. No accountant or financial advisor wants to commit to confirming what that threshold is. My personal experience says that it’s 100% before you start earning £100,000 per year. I paid a lot of tax in my first full year as a freelancer and learned the hard way.
Total cost to set up as a freelance business: £3,000
How much does it cost to set up a freelance business?
In a conservative model, you’re looking at £3,000 to set up a freelance business.
If you don’t have clients, you’ll need to spend more on marketing and advertising. If you are conservative or have the skills to do things like web design and accounting yourself, this can reduce dramatically.
But, more than likely, you want to get on with your craft. That’s the appeal of going freelance, right?
The good news?
I went a full year without an accountant. After my first year with an accountant, I felt like a total idiot.
I’d spend money on my business without realising what I could claim as tax-deductible. Sure, I could fill out a self-assessment form with ease, but it wasn’t benefitting me.
So, when I hired an accountant for the first time and paid 33% less tax despite earning 75% more, I was both happy (with my accountant) and furious (at myself).
I’d spent all the money setting up my freelance business in year one, but only started treating it like a business in year two.
The good news is that if you’re setting up a freelance business, pretty much all the costs are tax-deductible.
Think of these costs less like money lost and more like money invested.
The tax man sees it that way, so why shouldn’t you?
