I have directorship in a company that my friend set up so that we could take advantage of tax laws and pay less tax. Due to my financial ignorance (and desire to remain stupid) all these years, I had never really done more than ask a few contractor friends here and there about what it was like to work as a contractor. When my friend took the plunge last year, all I bothered to ascertain was that he pays a flat rate 20% corporation tax on the money he earns as opposed to the different tiers, maxing out at 40% for his income bracket.
We all know side hustles are for making extra money
If you’re new to my blog before, then you don’t know that I hit rock bottom in May and started my journey to financial independence in August. So far I’ve had 5 different kinds of side hustles
- Subletting – This was essential right after the crash. I couldn’t afford my rent anyway and I needed some time to get back to the point that I could afford the basics. I had someone take over my room while I surfed my friends’ spare rooms and sofas. He paid me £1 400 or so for 7 weeks. It was enough money to cover my rent and bills and leave a few spending pennies in my wallet.
- Errand running – I do some tasks for my cousin and she pays me £10-30 every so often.It’s sporadic and unexpected but every little helps.
- Cleaning – I spoke to my (rather lazy) housemates when our (unreliable) cleaner could’t do our house anymore that I would be a great cleaner. They gave me a trial, realised that I was far more thorough than the old cleaner and kept me on for 3 months. I got paid £40 a month. Sadly this will stop now because I have new housemates that are willing to clean but I also get to pay £30 less on my bills going forward every month. Woohoo!
- Front of house (FOH) at a theatre – I’ve had a zero hours contract at a theatre for the last 3/4 years (since I was doing my master’s). Every month we get a doodle and indicate our availability then depending on who else is interested, what’s on and how many shifts there are available, I do 0-10 shifts a month. In the summer, right after the lowest of the low points, I consistently did 10+ shifts a month. It pays the London living wage and holiday pay in-lieu (around £10.43 an hour) but the £250-350 a month is a fantastic way to pay for my social life & fund travel.
- Research – I’ve been lucky enough to get some freelance work with an international company that wanted a local for a UK study. I get paid at a rate that’s nearly twice my current salary and mostly do the work when I can fit it in (including dead time at work sometimes). I’m expecting between £300 and £1000 a month for November through to March.
What I didn’t know was that I would learn too
So I already pay the second highest tier of tax (40%) on some of my income if we take only my main job into account. With all the other side hustles, I have to pay quite a bit in the 40% tax bracket and I feared doing work that was effectively pointless. I’ve consequently had to do quite a bit of research into income tax, corporation tax, how to get your wages/money if you declare money as part of a limited liability company, and the reason for today’s post – what to do if your client wants to pay you in foreign currency.
I don’t know if any of these things are common knowledge and I certainly still feel like I haven’t taken the best course of action yet but I’m happy enough with my decisions so far.
Generating invoices as an individual vs as a corporation
This is what I understand, following lots of gov.uk research. My friend earns all his money as a freelancer. He declares it all as company income and pays 20% VAT (charged to the client) as 20% corporation tax on his profits. This is possible because he pays himself a wage that’s less than the £11 000 personal allowance. My dilemma was that I already get a £9 600 personal allowance (reduced because I just get the basic 20% tax rate on the FOH job). So I was worried that if I took any wage from the company, not only would I have paid 20% corporation tax, I would also then need to pay the higher tax. I was assured (by my friend) that if I was only a director as opposed to an employee, I could pay the 20% tax and that would be that. I don’t understand how I could then get access to the money legitimately and don’t want to risk doing something illegal or unethical.
Since I’d need to pay an accountant to ensure that I was merely avoiding tax and not evading it, I’ve just sent off an invoice as an individual and will pay the 40% tax on all the freelance work I’m doing. I’m privileged enough as it is to earn enough to pay that much tax so I’ll suck it up and pay it.
Receiving money in foreign currency
Having issued my first invoice to my client last week, I got a response this morning asking me to invoice them in Euros. I was perplexed. What rate do I use to ensure that I don’t get screwed over? Can I receive money in my bank account in Euros? Is it free to do so if so? I started with Google and didn’t quite find satisfactory information so I called my banks. These were my options:
1. I could open a foreign currency account. Costs around £12 a month to maintain and has eligibility requirements (I meet them). Pro I could leave the money in there in Euros and hedge against Brexit that way Con I already have one account that I pay £9.95 a month for and another I pay $4.95 a month for. There’s only so many bank fees that I sign up for before it gets ridiculous.
2. I could just receive the money in foreign currency into my account: The banks apparently change around £8 per transaction over £100 so if I invoiced monthly, I’d expect to pay £40 by the time I’m finished with the project. Pro There’s no guarantee that I’ll ever do another foreign currency job so this keeps me flexible and I pay only when I need to. Secondly, when people make international payments they can elect to pay only their bank charges or all the charges on both ends. I’m hoping that as a business, the client will just pay all the charges as we never discussed Euro rates anyway. Con I’m still paying fees that I wasn’t expecting to.
I also couldn’t decide where to place my Euro rates. If you go to a bank, there’s a difference between the rate that they buy euros back from you and the rate that they sell them to you. If I used the actual (official) rates then I would lose two fold. Firstly, I couldn’t change the rates every invoice. Secondly, I’d get the bank’s ‘buy’ rate for the Euro which would be horrendous particularly since my expenses were already incurred at the ‘sell’ rate for the Euro. So I gave them the bank’s current ‘sell’ rate, rounded up. I’m hoping it works out.
These are just a couple of things that I’ve had to research because I can no longer be the ignorant pay as you earn (PAYE) employee. I feel rather grown up.