Here’s how to organise your financial life if you’re a freelancer or sole trader.
Sole trader is the most straightforward business or legal structure if you are self-employed. Depending on the nature of your business, other options include a partnership (with someone else) or setting up a limited company. If you have a partnership or limited company, your business finances should be kept completely separate from your personal finances. But there’s a bit more overlap if you are a sole trader.
Sign up with HMRC
To register as a sole trader with HM Revenue and Customs, you need to sign up for self-assessment. You will need your national insurance number to do so. You need to get it done by 5 October following the end of the tax year in which you started your business. Don’t forget, as failing to register can result in a fine of up to £100.
Once registered, you will be sent your 10-digit “unique taxpayer reference” (UTR), which you will use on all your subsequent tax payments.
You might already have a UTR if you are already registered for self-assessment: it will be quoted on correspondence from HMRC. If you became self-employed after registering for self-assessment, you still need to register online as a sole trader via the Government Gateway system. This will register you for class 2 national insurance contributions (NICs), which help you to qualify for benefits such as the state pension.
You will need to keep business records and complete and submit a self-assessment tax return every year.
David Maslen, head of tax at the accountancy firm Old Mill, says: “Profits from the business will be subject to income tax and class 4 NICs. Class 2 NICs are voluntary from 2024-25 and would only be made where needed in order to preserve access to certain benefits. Both the tax and NICs are reported and paid through the self-assessment system.”
Save for your tax bill
The number one rule of freelancing is to put money aside for your tax bill. If you are a sole trader, you will need to pay tax by 31 January and 31 July each year. Miss a payment and you will be charged a penalty, and interest, too.
The best way to make sure you have enough money to pay the tax due is to stash away a proportion of each invoice you are paid. If you are not sure how much to save, the HMRC ready reckoner tool can give you a rough idea.
Keep the money in a high-interest easy access savings account or a notice account. Or you can take a punt on premium bonds, which can be quickly cashed in so you have the money when the bill falls due.
Work from home
Assuming your work is computer-based, working from home will be the cheapest option when you start out. In an ideal world, you would have a separate room to use as an office, creating a clear division between your work and home life. If not, setting certain hours for your job can help you manage your work-life balance.
Swanky shared office space with nice coffee might be cool, but it costs money.
If you need to get out of the house, plenty of cafes have spaces set aside for freelancers on a drop-in basis, usually for a daily or half-day fee.
Calculate your expenses
You can offset business expenses when you do your tax return – these include the costs incurred working from home.
If you are a sole trader, you can either calculate exactly what you spend for work purposes, or claim a flat rate (also known as “simplified expenses”) based on the hours you work from home each month. Assuming that you put in a typical 35-hour week, you would be able to claim £312 a year for home working.
The flat rate does not include phone or internet expenses, so you can add the business proportion of these bills by working out the actual costs. Other additional allowable expenses include training courses, advertising and marketing, your website, and any travel costs. You can also claim what are known as capital allowances when buying computers and other equipment.
Get paid
If you are working in a creative industry, be wary of anyone who wants you to work without pay, and offers “exposure” in return, or vague promises of future work. By accepting these offers you are devaluing your work.
Set your payment terms at the outset – asking to be paid within 30 days is reasonable – and don’t be afraid to chase unpaid invoices by phone or email.
If your correspondence is ignored, a legal “letter before action” can be downloaded online, for example via the website Rocket Lawyer, or a threat to add interest and compensation to the amount owed can often spur accounts departments into action.
Use an accountant
Hiring an accountant to complete your business accounts and tax return can be money well spent.
James Shaw, of the accounting firm Sapphire, says: “Hiring an accountant allows you to focus on running your business while they take care of the complex, time-consuming details.”
If you are self-employed and hoping to secure a mortgage, having a few years of certified accounts is crucial.
“Mortgage lenders look for evidence of stable income, and professionally prepared accounts demonstrate that your business is financially sound, giving you the best chance of securing that loan,” says Shaw.
Save into a pension
Self-employed workers are entitled to the state pension in the same way as anyone else, assuming a sufficient NIC record. But a major downside of self-employment is not having an employer to contribute to a workplace pension.
You are on your own, so make sure you set up a personal pension. The provider will claim tax relief at the basic rate of tax on your behalf and add it to your pension savings. If you are a higher-rate or additional rate taxpayer, you can claim additional tax relief via your self-assessment form.
Alternatively, some pension schemes use the “net pay arrangement method”, where tax relief is instead given by deducting the gross pension contribution from your earnings before you pay tax. Tax relief is given there and then by reducing your taxable earnings.
Organise your finances
Whether you need a business bank account or not depends on the nature of your business. If you have lots of expenses to track, it can make sense. Most business accounts charge either a monthly fee or a cost per transaction.
A cheaper set-up might be to have one current account into which your income is paid, then pay yourself a salary into another current account each month.
A fluctuating income can make financial planning difficult, as most budgeting techniques assume that you have a steady income. If your income varies, set up a minimum monthly budget that covers all your essential bills. Your lowest monthly income should be able to cover this. If not, you will need to look at where you can cut back – or earn more.
If you earn more than the minimum, save the extra money to cover the slack periods.
Andrew Hagger, at the website MoneyComms, says: “Ideally, put away the maximum you can afford when you first start out as a freelancer to try to build a buffer for those times where work may dry up for a week or two.
“I think that as a minimum I’d recommend aiming for an ‘emergency pot’ sufficient to cover two months’ worth of your essential bills – ie, utilities, transport costs, food, rent/mortgage and, though not seen as essential, perhaps a bit extra to cover drinks/meals out, as you still need to live.”
Some of the new banking apps are great for separating your everyday cash from your survival fund; the “Spaces” option from Starling Bank is a good example.
Remember that as well as saving for quiet periods, as a freelancer you will not get holiday pay or sick pay, so you will need money to cover those, too.
Check your benefits entitlement
If you cannot work due to illness, you might qualify for “new style employment and support allowance” if you have made sufficient NICs.
If you are on a low income, you might also be able to get universal credit. This is means-tested and, if you have a partner, his or her earnings will be taken into account, too.
You cannot get statutory maternity pay if you are self-employed, but you might qualify for maternity allowance. This will be between £27 and £184.03 a week for up to 39 weeks, and depends on your national insurance record.
