One of the most common complaints I hear is how most mainstream personal finance guidance, how many budgeting spreadsheets, saving plans and financial products, are geared towards people with a steady, salaried income from an employed role. And yet, there are more than five million self-employed people in the UK – so how do you manage your money when you work for yourself?
Of course, there’s not just one brand of self-employment, either. You can operate as either a sole trader or a limited company, and there are pros and cons to both. As a general rule, most accountants will advise that it’s more tax efficient to operate as a limited company once you are earning over £30k per year, and certainly most would suggest it before you hit the VAT liability threshold of £85k. But however you operate, here are a few ways to make managing your money as a free agent easier and less stressful:
Keep your business and personal finances separate, in every sense of the word
This means keeping your money completely separate, both in terms of your mindset and the practicalities. Mindset is important here, because when you’re employed, the financial reward for your labour is set when you accept a job offer, or when negotiating at a salary review, but when you’re freelance, you could be setting or negotiating rates more or less constantly.
This means that you have a closer connection between your time and your money, and it’s easy to start seeing every moment of your time for its monetary value. This can make it really difficult to take any time off, and can mean that any questioning or even rejection of your rates can affect your feeling of self-worth, perhaps leading you to reduce your rates or offer your time for less than it’s worth. Having a clear idea of what your time is worth within your business, but making sure that your non-work time is not for sale can help you to really create a boundary between work and your personal life which will make both negotiating and taking time off easier.
In a practical sense, having a separate bank account for your business finances – i.e. for invoices to be paid in and out of – is something that you’ll probably benefit from doing as soon as possibly. This makes calculating your tax and business expenses easier, enables you to pay yourself regular amounts if you want to, and will essentially save you a lot of time that you could be spending earning or resting.
Save your tax right away
Again, when you’re employed, you don’t even have to think about tax. It’s whisked away before you even have a chance to look at it, so you don’t miss it (well, unless you spend too long looking at your pay slip) and can’t spend it. When you’re self-employed, you’re liable for your own tax, and you have to actually have it in your account before giving it to HMRC. The best way to handle this is to move your tax out to a separate account as quickly as possible, whether that’s a ‘pot’ or ‘space’ with a challenger bank, or a simple everyday savings account. It’s best to keep it in cash rather than investing it, because you’ll need quick access when it’s time to pay your tax bill, and you could find yourself in hot water if the stock market dips just as you need to get hold of it.
You can get great accounting software, like Quickbooks and Xero, which will give you an estimate on your tax as you go, otherwise you can go by a rule of thumb, like 30% of each invoice. It’s better to err on the side of caution and have too much rather than too little – and a little windfall at the end of the tax year isn’t such a bad thing if you do have an excess.
Know when’s the right time to get an accountant
If you’re just starting out and have a fairly good grasp of numbers, you probably don’t need to get an accountant yet – just make sure that you’re keeping meticulous records of the money that’s coming in and going out of your business, and that you’re on top of your self assessments. If things start to get a little more complex – maybe you’re thinking of moving to trading as a limited company or have multiple income streams – you might like to consider getting an accountant to manage your business finances, help you to be as tax efficient (not the same as avoidance or evasion) as possible, and assist you in planning your future business income and growth so that you can factor this into your personal financial goals.
Create a personal budget that allows for a flexible income
The biggest challenge when it comes to budgeting as a freelancer is that you can never be quite sure when an invoice is going to be paid, whether a contract is going to be continued, or what’s waiting around the corner. You can combat this by doing a few different things. The first is to create a budget with minimal monthly commitments – this could mean opting for quarterly utility bills, saving up to pay for car insurance and council tax in advance and keeping credit card spending to a minimum. The second is, once your business is a little more established, to pay yourself a set monthly amount from your business account to cover all of your main bills. It can take a little while to reach a point where you’re able to do this, so be patient with yourself. The final one is to try to create an emergency fund that can cover you if you enter a slower period of earning – a separate pot to pay yourself from.
Working for yourself has so many benefits, from flexibility to a higher hourly rate, but it’s so important to tailor your finances to this way of working, if you want to feel confident and in control of your money.