If you’ve decided to set up your own business and go self-employed, sorting out your finances as a freelancer can be the toughest challenge you face.
How much do you set aside to pay tax? Can you do the book-keeping yourself or will you need to get an accountant? How can you maximise incomings and minimise outgoings?
Such basic questions can prove crucial to the success or failure of your business, so try our step-by-step guide to setting your self-employed journey off on the right path.
1. Sort out your personal finances
These are the things that you should be doing whether you’re a freelancer or not, but the need to be prudent is especially important when you don’t have a regular pay cheque coming in.
Set a budget for yourself
Work out your monthly expenses, including a little extra for clothes, going out, travel, etc. You can use an online budget calculator, or just do it yourself with pen and paper.
Once you know this you have a benchmark for your new business ‒ this is the amount you have to earn each month in order to keep going.
Set up an emergency savings float
Ideally everyone should have an emergency savings fund that will cover their essential expenses for three-to-six months, but this can be particularly important for the self-employed. Read more in our article about savings pots.
Shop around for your essential services
Shopping around for gas, electricity, broadband, phone deals, insurance, mortgages and other financial products can save you hundreds, even thousands, of pounds a year.
Remember that, if you’re working from home, your usage of things like energy is likely to increase, so make sure you’re getting the best deal possible.
Start small and cheap
Don’t go out and splurge on state-of-the-art IT equipment, designer suits, laser-printed stationery and a posh office… keep your overheads to a minimum.
Work from the kitchen table if necessary, use your old computer and make the most of your best clothes. Don’t start spending until you absolutely have to, or you’re making so much cash that you can afford to.
When there are business essentials that you need, look into cheap ways of getting them. For example, you can get 250 free business cards from Vistaprint, or you could look into software from companies such as Hewlett Packard and Microsoft that help you design your own.
If you’re struggling to get started, try this useful government page on how to write a business plan, which includes example plans and templates.
You’re basically working out how much you could expect to earn each month and what your costs will be.
Even if the sums leave you in the red it’s not the end of the world… providing the figures start turning themselves around after a period of time.
You may need to think about supplementing your income in another way, especially in the first few months as you build contacts and reputation… you’ll find a hatful of ideas on how to do that in our money-making pages.
One of your first moves should be to register as self-employed with the government.
Assuming you’re reasonably savvy with computers, set up an online account for filing your tax returns – this can take a little while to register on the system, and it’s much better to do it now than as part of a last-minute scrabble to file returns.
Right from the start you should make sure that you keep all your business receipts. This means all your train tickets and tax receipts for travel you did for work, receipts for stationery and from the post office, phone bills and so on – anything that you can argue is for business use.
The government website has an overview of the expenses you can legitimately set against income for tax purposes. If your circumstances are fairly simple, it may be easier to set a flat fee per month for things like using your home as an office (including things like a proportion of your energy bills).
Store all your business accounts by the tax year they apply to (the tax year runs from 6 April to 5 April the following year). You might keep each year’s accounts in a flashy filing cabinet or an old shoe box, but make sure they’re organised – they have to be kept for at least five years.
Again, the government website has plenty of information on business record keeping.
As you store your records, also try to set up a regular schedule for entering the details into a spreadsheet on your computer; depending on your business, once a month may be a reasonable timescale for entering your incomings and outgoings.
There are various software packages available for business book-keeping, some of them free, but if your freelance affairs are quite straightforward all you may need is a simple Excel spreadsheet – a quick online search should find you some templates that are available for free download.
Do I need an accountant to do my books?
Taking these basic steps to organise your business accounts may well save you the expense of employing an accountant when it comes to filing your tax returns.
This will all depend on the nature and complexity of your business, though, and an accountant may be able to save you a lot more than he or she costs.
But even if you do employ an accountant, organising your books efficiently will mean they spend less of their time hunting for receipts and more on using their expertise to save you money.
If you’re a sole trader or partnership you may be able to use a personal current account, but limited companies must have a dedicated business account.
Business accounts can come with regular transaction and monthly fees and a multitude of other charges.
But they can also come with benefits such as overdrafts to help with cashflow and advice. Perhaps more importantly, they can help to separate out your personal and business finances.
Whether this will be worth the fee will again come down to your circumstances; a personal account may be fine for a small, start-up, freelance situation, but won’t be suitable for a more complex business.
5. Chase your invoices
One of the banes of small businesses is trying to get larger corporations and other clients to pay their bills on time.
There’s no simple answer to this, but the best advice we can give is to be clear and organised with your invoices ‒ both when they’re initially filed and when you follow them up ‒ and to keep copies of your correspondence with your clients.
If you don’t already have a defined payment schedule, politely set out on the invoice that you expect it to be settled within a reasonable period of time, perhaps 30 days. If those terms aren’t met, follow up with further emails and/or phone calls.
Of course, you don’t want to upset the client and lose future business from them. But, if all else fails, send a final warning before considering a solicitor’s letter, which can be obtained for just a few pounds.
6. Do you need income protection insurance?
As a self-employed person, you won’t, of course, have the back-up of sick pay from your employer.
Hopefully you’ve sorted out your emergency savings pot, but this will only last for so long and any government benefits you’re entitled to may not be adequate.
Many self-employed people take out income protection insurance to cover them for difficult times, and it may also be worth thinking about critical illness cover, plus life insurance if you have family to consider.
7. Remember your pension
The need for all of us to give more thought to our retirement is becoming increasingly clear as the state pension comes under more and more pressure.
Workplace pensions are on the rise, and private pensions are an area that freelancers and the self-employed need to take seriously.
There are significant tax benefits associated with pensions savings – read more from the government-backed Money Advice Service.
8. *Set money aside for tax*
This is one we really can’t stress enough… when the money comes rolling in, remember that it hasn’t been subject to income tax or National Insurance contributions, but that you’re going to have to pay that tax further down the line.
What’s more, after you’ve been earning for a year, you have to pay two lots of tax; one bill in January and another in July.
A good rule of thumb is to set aside about 20% of your income each month, but this will depend on how much you earn; if you earn above the basic rate of tax, you’ll be taxed at 40%, or even 45%. Read more on income tax rates and personal allowances on the government website.
Think about putting the money you set aside into a savings account that pays as much interest as you can find AND that you’ll be able to access when it comes time to pay your tax bill.
If you’re registered for VAT, apply a similar theory; setting aside the money you need every month so that you can pay the quarterly bills without going into the red.