Any freelancer will know that being self-employed isn’t all about working from coffee shops, wearing whatever takes your fancy or waking up at lunchtime. Freelancing is hard: work is never guaranteed, and you’re only as good as your last job. Because the volume of work can be unpredictable, managing your budget can be tricky to say the least. Here are five tips to help overcome those challenges and keep that cash flow flowing.
1. Keep your business and personal accounts separate
Never mix business with pleasure – right? The trouble with freelancing is that if you love what you do, then business is pleasure and it can be hard to separate the two. But while there’s no legal requirement for you to have a business bank account, there are big benefits to formally separating work money from ‘me’ money.
In particular, if you’re a freelancer operating as a limited company, formally separating your assets with a business account in your firm’s name ensures you and your business are two distinct entities. It means you can’t be held personally responsible for any debts or losses incurred. It also means you can be paid a salary by your business and earn dividends from any profits.
2. Work out your income
Freelancing is like a rollercoaster ride. There are highs and lows, and you never quite know what’s around the corner, so balancing your income and outgoings can be a real challenge.
The only way to predict future income is to keep track of your monthly earnings as soon as your business gets up and running. After a couple of years you’ll be able to see any peaks and troughs, allowing you to squirrel away funds during busy times to tide you over any downtime and help you manage your month-to-month cash flow.
3. Keep a record of expenses, and spend wisely
Rent, Wi-Fi, heating, phone calls, web hosting fees – expenses have a habit of piling up – so, just like with your income, keep a record of your outgoings too.
If you’ve got a business bank account, use this to buy equipment and pay bills. Keep your receipts, too, if you want to deduct these essentials from your tax bill.
Keeping records also puts your spending into perspective – after all, that cute cat notebook and matching fluffy pen topper might have been irresistible, but did you actually need them?
On the other hand, some things are really worth splashing out on, like other people’s expertise. While paying someone else to do things can feel reckless, delegating specific tasks to an expert can be money well spent. Don’t feel guilty about hiring an accountant, web designer or copywriter. Not only will it free up your time (so you can actually earn some money) it’ll ensure your business looks professional and runs smoothly. And don’t forget: you can also claim these services back as legitimate business expenses.
4. Set aside money for tax
HMRC might like us to believe that tax doesn’t have to be taxing, but that’s not necessarily true in reality. As a freelancer, you don’t have the luxury of a net pay packet with all your tax taken off at source – you’ll need to work it out yourself, which can be a head-scratching and frustrating exercise.
In terms of what you owe, it’s the same as for someone who is employed. You get a personal allowance of £12,500 (for the tax year 2019/2020). Any profit you earn between £12,501 and £50,000 will be charged 20% income tax. If you’re flying high, earnings between £50,001 and £150,000 are subject to 40% tax, and anything over £150,000 is taxable at 45%.
The easiest way to budget for tax is to have a tax column in your income spreadsheet and set up a formula to deduct the tax amount from what you’ve charged. In this way you can work out the tax you owe per job, per month and, ultimately, for the tax year.
But that’s not the end of it. You also have to remember your ‘payment on account’ instalments, which are advance payments on the following year’s income tax (yes – that’s right – paying tax on money you haven’t earned yet). Payment on account can be mind-blowingly confusing. In very simple terms you’re paying your tax bill twice, with the second payment acting as a sort of deposit for the following year’s tax bill. Don’t worry: if you overpay, HMRC will give you a refund (which always feels good).
5. Make your money work too
Setting aside money for tax is all well and good, but where exactly are you putting it? A current account is fine for everyday business expenses, but stashing your cash in a high interest account or ISA will earn you some interest. If you don’t need to access your funds on a regular basis, look for accounts that limit withdrawals, as they’re likely to offer better interest rates.
