Freelance work comes with many perks. Financial stability isn’t one of them.
Unlike salaried workers, freelance income often comes sporadically. Paying taxes also becomes a personal responsibility, as is setting up a pension plan for retirement.
Not surprisingly, money is a stress point for freelancers. This usually translates into trouble with budgeting.
Not to worry. Irregular income does not condemn you to a life of financial instability. In fact, it makes budgeting essential.
How to budget as a freelancer
Here are seven budgeting tips for freelancers to get their finances on track.
1. Separate your personal and business bank accounts
Rule one for budgeting as a freelancer: have two bank accounts. One account is for business income and expenses. The other is for personal transactions.
While not mandatory if you are a sole trader (meaning you haven’t incorporated your freelance business), having all financial transactions in one place will be unbelievably useful when it comes time to pay taxes and claim expenses – think of it as a gift to future you.
2. Set a business budget and a personal budget and priorities
Once you set earnings to go into your business account, it’s time to think about how much you want to pay out of that account and into your personal. In other words, your income.
Now this is hard – you will want to think of all earnings coming in as your income. But if you want to stability, you have to have discipline.
Because freelance income has highs and lows, so you will need to find a middle figure to regularly pay yourself. When times are good, what you are not paying yourself will compensate your income when work is slow. Your income should also account for taxes and other expenses – more on that below.
I recommend revisiting and readjust this figure about every year.
3. Track your cash flow
Besides income, your business probably has expenses. Keep track of these for tax deductions!
“Wait,” I hear you thinking, “what expenses can I claim as a freelancer“?
Good question. Much of the day-to-day business cash flow as a freelancer qualifies.
If you work from home, a lot of personal expenses and business expenses overlap and can be tax deducted. This includes Wi-Fi, heating, and phone service (within reason, see the HMRC guidelines here).
Other business expenses like web hosting, subscriptions, travel and meals can also be tax deducted. So keep your receipts. And for administrative ease, use your business account to cover all expenses.
Tip: You can link your bank accounts to Money Dashboard. This will give you a high level view of all inflows and outflows, and you can tag any expenses by category for easy record keeping.
4. Understand your taxes
You really don’t want to mess this one up.
Understanding how taxes affect your income and expenses will change how you plan your freelance work. The more you know at the start of your freelance career, the better off your finances will be.
So take the time to review the basics. Some useful resources are here and here.
5. Set aside money to pay taxes on time
At a high level, your top tax concern is having enough money put aside when the tax bill is due.
Depending on how much you are making it’s prudent to put aside at least a third of your income.
You can pay this from your business account all at once, or build up that amount month by month. Ideally, you can open a third bank account where you make regular monthly deposits equal to about a third of your monthly earnings.
You want to avoid any fines from HMRC due to miscalculations or late payments. So it doesn’t hurt to enlist the services of an accountant to review your self-assessment (the deadline is 31 January every year).
6. Build an emergency fund
Don’t neglect your emergency fund. You never know when you will need a financial buffer. It will also put you at ease when it comes to holidays and sick days.
An emergency fund should equal about at least three months of expenses. It can take a while to accrue that much money. For tips on how to build an emergency fund, see our guide.
7. Invest in your pension
Only about a third of UK’s 4.8 million self-employed are saving into a pension.
Understandably, irregular income can make it hard to think about future savings. And one of the big downsides of being freelance, (and contracting under IR35), is employers aren’t adding money to your pension, as they do for salaried workers.
But this is no excuse. Self-employed people are just as entitled to a pension as salaried workers. So if you don’t already have a pension, apply to open one, then fund it every month.
Remember, you get tax relief on your contributions (up to £40,000 per tax year). And the sooner you start saving, the better.