10 questions to ask yourself before starting your IT freelance business

Are you considering launching your own freelance IT career and feeling overwhelmed by the many decisions ahead?

Don’t worry, that’s completely normal! While the registration process is straightforward, the administrative and financial choices you’ll need to make can be a bit more complex. Here are the 10 questions to ask yourself before diving into your freelance IT business.

1. Am I entitled to unemployment benefits as a business founder?

In the UK, if you leave your job voluntarily to start your own business, you're generally not entitled to unemployment benefits such as Jobseeker’s Allowance (JSA) or Universal Credit. However, if you were made redundant, you might be eligible to claim Universal Credit, which can provide some financial support while you're setting up your business.

It’s important to note that Universal Credit eligibility depends on your income, savings, and whether you’re working part-time. Some self-employed individuals can continue receiving Universal Credit if their business income is low. Be sure to keep track of your earnings, as you’ll need to report them each month.

2. Should I consider private health insurance or income protection?

While the NHS provides essential healthcare services to all UK residents, many freelancers choose to take out private health insurance. This allows for faster access to specialist treatments and avoids long waiting times. Additionally, income protection insurance can provide financial security if you're unable to work due to illness or injury, as freelancers don’t have the safety net of statutory sick pay.

3. Which business structure should I choose?

The legal structure you choose for your freelance business will determine your tax obligations and how much paperwork you need to complete. The main options for freelancers are:

• Sole Trader: Simple to set up with fewer administrative requirements.

• Limited Company: Offers limited liability but involves more paperwork and costs.

• Umbrella Company: You work as a contractor but are technically employed by an umbrella company, which handles taxes and administration.

Each structure has its pros and cons, so it's crucial to consider your future goals and the complexity of your contracts when deciding.

4. Do I need to keep financial records?

If you're operating as a sole trader, you need to keep accurate records of your income and expenses to complete your annual Self Assessment. If you opt for a limited company, you’ll need to file annual accounts with Companies House and keep more detailed financial records. Using an accountant or accounting software can help you stay on top of this.

Find our freelancer accounting services here

5. Will I need to register for VAT?

You must register for VAT if your turnover exceeds £85,000 annually. However, if your turnover is below this threshold, you can voluntarily register, which allows you to reclaim VAT on business-related purchases. Keep in mind that being VAT-registered can add extra administrative tasks but may benefit your cash flow, depending on your circumstances.

6. Will I pay business rates?

In the UK, business rates are typically paid by businesses that occupy non-domestic properties. If you work from home, you may not need to pay business rates unless a part of your home is used solely for business purposes, such as a dedicated office or workshop.

For small businesses, the government offers Small Business Rate Relief, meaning you might be exempt from paying business rates altogether if your property’s rateable value is below a certain threshold. It’s worth checking with your local council to see if you qualify for any reliefs.

7. Do I need to pay Corporation Tax?

Sole traders don’t pay Corporation Tax – they pay income tax based on their profits. If you operate as a limited company, however, you’ll need to pay Corporation Tax at 19% on your company’s profits. Don’t forget to file your Corporation Tax return each year alongside your annual accounts.

8. Should I take out professional insurance?

In the UK, while not all insurance types are legally required, many clients may ask freelancers, particularly in IT and tech sectors, to have professional indemnity insurance. This covers you if a client claims your work caused them financial loss due to mistakes or negligence.

You might also consider public liability insurance if you’re dealing with clients or suppliers face-to-face, and cyber insurance, which is especially relevant in tech and IT, where the risks of cyber-attacks and data breaches are high. These can protect you financially in case of legal action or claims against you.

Find out more about professional indemnity insurance here

9. Will I build a pension as a freelancer?

As a freelancer, you won’t have an employer contributing to a workplace pension, so it’s important to plan for your retirement. You can set up a personal pension scheme or a self-invested personal pension (SIPP) to build your retirement savings. Contributions are tax-deductible, and the government will top up your contributions with tax relief.

10. Can I get a mortgage as a freelancer?

Getting a mortgage as a freelancer can be more difficult, but it’s definitely possible. Most lenders will want to see at least two to three years of accounts to assess your income stability. Having a good financial track record and using an accountant can make the process smoother. Some lenders offer specialist mortgages for freelancers, so it’s worth shopping around or speaking with a mortgage advisor.

Starting your own business as an IT or tech contractor can be an exciting but complex journey, with many important decisions to make along the way. From choosing the right business structure to understanding your tax obligations and insurance needs, careful planning will set you up for success.

If you're ready to embark on your freelance career, don’t forget to register on Free-Work to access the best opportunities in the IT and tech industry. Plus, subscribe to our newsletter to receive more valuable guides and insights into freelancing, contracting, and growing your IT career directly in your inbox. Let Free-Work be your go-to resource for all things freelancing!