Understanding Freelancing & Business Ownership in the UK
Freelancer vs. business owner UK, which is best? ‘Freelancers’ in the UK are typically individuals who provide services to several clients on a one-off or recurring monthly basis. They set their own fees and working hours and may work from home, in a shared working environment, or in an office.
Examples of freelancing in the UK include:
- Graphic designers
- Virtual assistants
- Social media marketers, and
- Copywriters
‘Business owners’, on the other hand, typically employ others and have a more structured business or company. Freelancers might also call themselves business owners, and business owners might call themselves freelancers. As such, there is no hard and fast definition of either.
Legal & Tax Differences Between Freelancers and Business Owners
The legal and tax differences between freelancers and business owners depend on the type of business structure adopted. In practice, a freelancer and a business can adopt the same type of business structure and, therefore, have the same legal and tax implications.
The most common types of business structure in the UK are:
- Sole traders
- Partnerships
- Limited companies
Sole traders and those in a partnership must be registered with HMRC for self-assessment tax and must submit a tax return each year. Limited company directors and owners have the added benefit of being personally protected from the company’s debts and liabilities. They are also subject to much stricter duties and obligations as company directors, and the overall level of administration is higher than that of sole trader and partnership businesses. Limited companies must be registered and incorporated with Companies House, accounts must be filed annually, and corporation tax must be paid by the deadline.
Business owners with staff have to adhere to additional laws, notably employment, discrimination, and health and safety laws. These laws are designed to protect the working rights and well-being of employees in the UK.
Pros & Cons of Being a Freelancer in the UK
Advantages
- Flexibility
- Minimal paperwork and ‘red tape’
- Fewer legal obligations
- Control – can set own working time and location
- Better work/life balance
- Reduced overheads
Disadvantages
- No entitlement to sick or absence leave or pay
- Working alone can be isolated and lonely
- Less financial security
- Less financial growth potential
- Responsible for all aspects of the business
- May pay more in tax compared to a limited company
Pros & Cons of Running a Business in the UK
Advantages
- Ability to make key decisions regarding the running of the business
- Able to delegate tasks to others
- May pay less tax if registered as a limited company
- Greater business growth potential
- Is it possible to run multiple businesses at one time
Disadvantages
- More duties and obligations – especially for limited company owners and directors
- More administrative overheads
- More financial risk if the business is not successful
- The stress of dealing with staff and other aspects of a business
Financial Considerations: Taxes, Profits & Expenses
Freelancers
It is important to understand UK freelance tax vs. business tax. Taxation in the UK for freelancers registered as a sole trader is extremely simple. A self-assessment tax return must be prepared and submitted to HMRC each year, and any personal tax on any profit must be paid by the deadline. Freelancers also need to pay Class 2 & 4 national insurance contributions (NICs). VAT must also be collected from clients and paid to HMRC if turnover exceeds £90,000. Any VAT on business-related expenses can also be reclaimed. Some expenses can be deducted from any taxable profit as long as they are allowable expenses, such as stationary, phone bills, advertising and staff costs.
Business owners
Businesses registered a limited company with Companies House pay corporation tax at a rate of 19 – 25% on any profits made. Shareholders who receive dividends must also pay dividend tax Dividends at 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). The first £500 of dividends is currently not taxable. Profits are typically held within the company or paid in the form of salary and/or dividends.
Companies must also register for VAT if their turnover exceeds £90,000. Some additional VAT schemes are available, including the VAT Flat Rate Scheme and VAT Cash Accounting Scheme. Companies also have a wide range of allowable expenses, including the Annual Investment Allowance. When it comes to freelancer income vs. business income UK, business owners have the potential to earn more money in line with the scale of their operation.
Which Has More Growth Potential?
When comparing growth potential, businesses with staff typically have a much higher potential for long-term growth compared to freelancers. This is because a freelancer can only do so much work in a day, whereas a business can scale up its operations by hiring employees, creating new products and services, and entering new markets. The growth potential of a freelancing business is limited to the owner’s ability to expend time and effort on projects, limiting scalability and growth. With that said, many freelancers prefer to trade the growth potential of a larger business with staff for the peace of mind that they are not responsible for the livelihoods of others.
Work-Life Balance & Responsibilities
Freelancers are typically viewed as having a better work-life balance compared to business owners. This is because freelancers can set their own working hours, even if this means working on the weekend in the evening or while on holiday. While this may be true in the short to medium term, a business owner who builds a successful business may transition from working all hours on their business to eventually pulling back and enabling their staff to run the operation. This takes time, however. In addition, freelancers often find themselves having to work even harder to maintain their income and lifestyle.
Ultimately, the decision comes down to risk and reward. Freelancers who want to run a smaller operation with no staff will have the benefit of reduced responsibilities and greater work-life flexibility, but business owners can work towards untethering from their business, effectively creating a passive income.
How to Transition from Freelancer to Company Owner
You can transition from being a freelancer to a company owner at any time by completing the following steps:
- Check that your business name is not already registered with Companies House and meets the company naming rules
- Select who your directors and shareholders will be (even if it is just you) – you will need to provide this information to Companies House.
- Prepare a ‘memorandum of association’ and ‘articles of association’ – you can use standard ones if appropriate.
- Register your company with Companies House online and pay the application fee – either directly through Companies House or a company formation specialist.
- Companies House will normally send your certificate of incorporation within 24 hours.
As part of the incorporation process, your company will be registered for Corporation Tax with HMRC. We recommend instructing an accountant who can handle your accountants, expenses, VAT, PAYE, and any other financial aspects of your new company.
Key Skills Needed for Success in Both Roles
Freelancer
- The ability to work independently, be disciplined and motivated without supervision
- Strong time management and organisation skills to ensure that the needs of your clients are being met
- Invoicing to ensure timely payment by clients
- Negotiation – being able to agree on a suitable rate for your services with clients
- Customer service – dealing with your clients on a daily basis
- Branding – it is important to create a strong and professional presence online to attract new customers
Business owner
- Leadership – managing staff and steering the strategy of a business requires strong leadership skills.
- Financial management – it is important to understand the financial aspects of your business, including cash flow, margins, asset values and investments
- Business strategy – In order to be successful, businesses need a clear and robust strategy that sets the direction for the future and goals.
- An understanding of the duties and obligations of a company director under the Companies Act 2006
- Recruitment and team building
- Sales and marketing
- Risk management – It is essential to identify any risks faced by your business and put in place ways to manage them.
Final Decision: Which is the Right Choice for You?
If you are asking yourself, “Should I start a business or freelance in the UK?” it is important to consider all of the implications, risks, and benefits before making a decision. Ultimately, when it comes to self-employed vs. limited company UK, there is no one correct decision for everyone. It will depend on a range of factors. Generally speaking, if you want a simple business with minimal administration, no staff, and you don’t plan to scale significantly, freelancing is most likely the best route for you. On the other hand, if you want to grow your business, hire staff, and have the benefit of limited liability, becoming a company owner may be the best option for your immediate and long-term business needs.
Self-Sponsorship Route UK
If you are an overseas business person who is contemplating establishing a business in the UK, it is important to consider your immigration options as soon as possible. One of the most popular UK immigration pathways in 2025 for foreign entrepreneurs is the self-sponsorship route. The self-sponsorship route UK allows foreign entrepreneurs to set up a business presence here, which they can use as a vehicle to sponsor themselves. To become self-sponsored, you will need a business ‘footprint’ in the UK (e.g. renting premises), a sponsor licence, and a Certificate of Sponsorship. An immigration law firm in the UK can guide you through this process.
