Going freelance: A financial checklist

Going freelance is an exciting and empowering prospect for anyone – however, it takes some serious financial planning to make sure it works for you. Here’s our top financial tips when venturing into freelancing:

Registration

As soon as you start working for yourself, you’ll be classified as a ‘sole trader’ and be required to register as such with HMRC. This puts you in sole charge of the company, including all financial outgoings, but does not prevent you from taking on additional staff if required.

While this will mean that you start paying income tax and national insurance on your profits and are required to fill in a self-assessment return each year, it requires relatively little administration to set up and avoids any hefty fines later on. It also enables you to claim running costs as ‘business expenses’, reducing your tax bill significantly.

Expenses

An ‘allowable expense’ is defined as necessary running costs, deducted from your company’s turnover, meaning that you’re not required to pay tax on such amounts. For example, if you turnover £50,000 and have £20,000 of allowable expenses, then you’ll only pay tax on £30,000.

Storing your receipts helps you to keep track of your freelance expenses, and claim money off your overall tax bill when you come to fill in your annual tax return. This can be time-consuming, so use accounting software such as Xero, which enables you to aggregate your receipts as they are collected, and log paper receipts from your smartphone.

Invoicing

Invoicing can be laborious, requiring numerous communications before the outstanding amount is settled. Some fundamentals will help to set you up in advance: such as requesting a deposit, offering a discount for prompt payment and scheduling invoices to be settled every two weeks rather than every four.

However, for better freelance invoice management, accounting software really comes into its own. Not only does it keep your accountant up-to-date with your cash flow in real time, you can also set up a payment schedule and preference for sending reminders from when the project begins, allowing you to concentrate on your work while the software automatically chases on your behalf.

Budgeting

Budgeting requires you to have a comprehensive knowledge of your cash flow, past and present. Xero both give you a bird’s eye view of your financial situation at a moment’s notice, having aggregated all your payments and outgoings over time. They also enable your accountant to work with you on a consistent basis, tweaking your financial arrangements as your business develops.

Plan your schedule around work that has proven profitable in the past and always ensure that you have access to a contingency fund. Use your cash flow knowledge to set a minimum predicted budget for every month – treat this as your base level. Then, come up with a realistic target budget, factoring in tax at 30% and savings of around 20%. This will not only give you a target, but will also help you calibrate your rates to an appropriate level.

If you’re a freelancer looking for advice on your finances, why not get in touch with our expert team today?