If you are working freelance, you will be responsible for declaring your income tax and national insurance liability to HM Revenue & Customs (HMRC). It is therefore very important to keep the necessary records.
There are two main options to consider for managing your finances when working freelance, these are:
- use a Freelancer Payroll Solution or umbrella company
- manage your own money.
If you work through an umbrella company you are treated as an employee and so you do not need to worry about completing tax returns or keeping detailed records The umbrella company will invoice your clients directly on your behalf and collect your income. It will then organise your tax and national insurance payments so you will be paid the net amount through the PAYE system.
Other benefits to using a Freelancer Payroll Solution include taking on responsibility for tasks such as chasing outstanding invoices and providing support and advice if you have a dispute with your client and the handling of client correspondence.
Manage your own money
An alternative to using an umbrella company is to manage your own tax affairs. To do this you will need to be organised from the beginning. Although you might not feel like you are running a business, you are working for yourself and therefore need to look at yourself as a small business.
The HMRC website provides a lot of information for those who are freelancing including:
- Details about free tax workshops that you can attend
- How and when to pay your tax
- National Insurance payments
- And many more
If you are going to manage your own money it can be a good idea to set up a separate bank account solely for your business affairs. This can be a normal current account. Once you have setup an account for your business you can track of your money with online budget planner Money Dashboard.
Money Dashboard is not an accounting tool but with Money Dashboard you will be able to quickly see how much money is coming into your account and how much is going out.
Money Dashboard will also be able to help you keep a track of all your transactions and as long as you keep your account loaded. Money Dashboard will also keep a history of all your transactions so you can keep going back in time to see all the money that has been coming in and going out of your account.
It will help to manage your finances if you set aside a certain amount of your earnings each month for tax. If you place 25% of your earnings in a savings account each month you will always have enough money available to cover your tax bills and hopefully some left over for yourself. Again, with Money Dashboard you will be able to label or tag these transactions from your current to your savings account to clearly see how money is moving around your accounts. Please note you cannot move money from within Money Dashboard.
Finally, it might be worth employing an accountant or discussing your finances with an expert to make sure you do not end up paying too much tax.