Self-Employed Work: What Changes the Moment You Start Invoicing

The work is the part people think about and the easy part. Four things change that have nothing to do with what you actually do, and getting them wrong is what turns a decent income into a bad year.

One: you are now responsible for the tax

No employer is deducting anything. You register as self-employed, file a return, and pay income tax and National Insurance on your profit: income less allowable expenses, not turnover.

The mechanical trap is the timing. The first bill arrives after a period in which you have been spending the money, and it can include a payment on account towards the following year, which makes the first demand substantially larger than people expect.

The defence is a separate account and a fixed percentage moved into it on every payment received. Put aside more than you think you need; a surplus is a pleasant surprise and a shortfall is a crisis.

Keep records from day one rather than reconstructing them. Allowable expenses are real money and the ones people lose are the small recurring ones nobody wrote down.

Two: insurance is now yours to arrange

Public liability if you work at client premises or the public can be affected by what you do. Professional indemnity if you give advice or produce work a client relies on. Employers liability the moment anybody works for you, which is compulsory rather than optional.

Which you need depends on the work and on what your contracts demand, clients frequently specify a minimum indemnity limit, and where they do, the figure is not your judgement call.

And check the vehicle. A car used to visit clients needs business use on the policy, and carrying anything or anyone for payment needs hire and reward, which no ordinary policy provides. See liability cover in detail.

Three: getting paid becomes part of the job

Invoice promptly, state payment terms explicitly, and chase without embarrassment. Late payment is the most common cashflow problem in self-employment and it is rarely malice. It is that nobody chased.

Take a deposit on anything substantial, particularly from a new client. It filters out the clients who were never going to pay and it funds the work rather than your overdraft.

Put the terms in writing before starting, even informally. Scope, price, payment timing. Most disputes are about what was agreed rather than about quality, and an email is enough to prevent nearly all of them.

Four: there is no sick pay and no holiday pay

A week not worked is a week not earned, and that changes what your rate has to be. An employed salary divided by working hours is not the equivalent self-employed rate, because it silently includes holiday, sickness, pension and employer National Insurance.

A reasonable way to price is to work out what you need annually, divide by the weeks you actually intend to work rather than fifty-two, and then add the cost of the insurance, the pension you now fund yourself, and the unbillable time: quoting, admin, chasing invoices.

That last item is the one most people omit and it is substantial. Very few self-employed people bill more than about two-thirds of the hours they work.

Employed, self-employed, or a company

Three structures, and people frequently end up in the wrong one by default rather than by choice. Sole trader is the simplest: you and the business are the same legal person, registration is straightforward, and you are personally liable for anything the business owes.

A limited company separates the two. It costs more in administration and accountancy, it brings filing obligations and a different tax treatment, and it puts a barrier between business debts and your own possessions. Whether it is worth it turns on profit level and on risk exposure rather than on how professional it sounds.

The third situation is the one to watch: work that is described as self-employed but functions like employment. If one client controls your hours, supplies the equipment and forbids you from working elsewhere, the arrangement may be employment in substance whatever the contract calls it — which matters, because employment carries rights that self-employment does not.

If most of your income comes from one client on their terms, that is worth taking advice on rather than assuming. The label on the contract is not what decides it.

What to do in the first month

Register as self-employed, open a separate business account, and set the percentage you will move aside for tax on every payment. Then buy whatever insurance the work and the contracts require, and write a one-page terms document you can attach to quotes.

Then look at a pension. Nobody is contributing on your behalf any more, and the tax relief on contributions is the compensation for that, which makes it part of the pricing rather than an afterthought. See where a pension sits against an ISA and the routes into this kind of work.

Frequently asked questions