Top 5 tips for managing freelancer finance

Deciding to make a living independently is a commendable life decision. But it also means you need to pay extra attention to your finances to ensure everything runs smoothly.

A freelancer is also business owner, and it is essential that you pay attention to every part of your business to keep it sustainable.

Acknowledging how self-employment and entrepreneurship is the biggest shift in the way we work, WeWhoDo and Coconut, the ultimate accounting and tax tool for self-employed people, have paired up to provide you with the top 5 tips to better manage your freelancer finances.

1. Plan for peaks and troughs

Freelancing involves many ups and downs. You are unlikely to earn a consistent amount from one month to the next, as it depends on how many projects come your way. Accept that slower months are an inevitability, and you need to plan for them by getting a good picture of your average earnings. The more years you have under your belt, the easier this becomes. Do your best to ascertain a solid number for your average income, and plan around that.

2. Keep track of your business expenses

It’s important to keep your personal and business finances separate. As a business owner, you are your own accounting department, and it’s in your interest to record every business-related expense you incur. An investment in a new laptop is a business expense. The costs incurred from your last business trip are too.

Every year, millions of self-employed people miss the opportunity to make key tax savings, resulting in more of their hard-earned cash falling into the pockets of HMRC.

The key to this is allowable expenses; knowing what you can claim and having a reliable and easy way to keep on top of it all so you don’t miss out.

You can claim business expenses on the likes of training, travel, accountancy fees and even working from home. So make sure you are clued up on what can and cannot be included.

Two useful questions to ask yourself are:
1) Is this expense ‘wholly’ for business use?
2) Is it justifiable?

If in doubt, it’s always worth chatting with an accountant.

3. Get clued up on IR35, and keep an eye out for updates in the coming months

It’s definitely worth familiarising yourself with the IR35 regulations to ascertain whether you meet the criteria of ‘self-employed’ or deemed an ‘employee’ for tax purposes. There will be more updates on this coming in April, so keep an eye out!

Under IR35, HMRC considers sole directorships as Personal Service Companies (PSCs), for tax purposes will be classified as either “inside” or “outside” the regulations. Currently you can assess this yourself by looking at the contract in place and your working practices. Three main things to look out for are: supervision, direction and control.

For example – supervision means the extent to which your client oversees your work and how you perform it to a standard they have specified. Control is where you have someone dictating the work you do and how you go about it. This also includes the power to move you from task to task as priorities change.

If you fall inside IR35, that means you are deemed an employee for tax purposes, and so will be required to pay tax at the same rate as an employee . This could have a significant impact on your earnings so you may want to consider increasing your contract rate by around 25% to allow for this. When it comes to IR35, it’s always best to seek advice from an accountant.

4. Work with a good accountant to budget wisely

Think about what you need in life, not just what your business needs. We all have things we want to do, bills to pay and retirement to plan for. You need to be putting money towards your annual tax bill, your general living expenses, an emergency fund, a retirement account and a fund for yourself. Set up a budget to accommodate all of these things, and you will maximise your long-term financial security.

As a freelancer, you have to pay your dues to the government in a lump sum at the end of the tax year. The simplest solution is to save money each and every month. The amount you’ll need to save varies for everyone, so do what feels right for you and your personal situation. Work closely with your accountant to come up with a remuneration plan for the year. This will allow you to know exactly what you need to put aside from a company and personal perspective.

5. Manage your VAT effectively

If you’re self-employed, you will need to register for VAT when your turnover reaches £85,000. The best way to manage VAT is to set the money aside immediately. For example, don’t think of VAT as income: if you get paid £120 including VAT only consider it in your mind as £100, immediately deducting the 20% you’ll have to pay in VAT. This will make sure you’re never caught short.

As a freelancer, it’s important to be in control of all the different aspects of your business. And your finances are a significant part, which can empower you as a freelancer, a professional, and an individual.

This article is written is collaboration with Coconut, the ultimate accounting and tax tool for self-employed people.

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