Freelancing can feel like you’re learning as you go, especially when it comes to money. If you’re wondering, “Am I doing this right?”—you’re not alone! This guide is here to help, step-by-step, with everything you need to know to set yourself up for financial success as a freelancer.
We’ll keep it simple and straightforward, so it feels less scary and overwhelming. Let’s get started.
Keep Business Money Separate
First things first: your freelance money needs its own space. Open a separate bank account just for freelance work. This isn’t just for people who own big businesses—you can do this even if you’re just a freelancer.
Why?
- It makes it much easier to see what money is for work and what money is for you.
What to use?
- I highly recommend Monzo Business (it’s easy to use and has great features like invoicing and savings pots).
- Starling Bank is another excellent option for UK freelancers.
- Revolut Business offers great tools for international payments if you have overseas clients.
How Do I Pay Myself?
If you’re just starting out, you probably don’t have a “salary.” Instead, all the money you earn from freelancing might go straight to paying your bills. That’s totally fine!
Here’s how to do it
- Transfer the money you need for personal expenses from your business account to your personal account. This is called an owner’s draw.
- Don’t worry if you can’t pay yourself a set amount yet—freelancing income can go up and down.
When things are more stable, you can give yourself a regular “paycheck” every month. This helps you plan your spending better, like having a steady job.
Example:
- If you earn £1,500 one month, you might transfer £1,000 for living costs and leave £500 in your business account for taxes and expenses.
- In quieter months, you can pull from your Emergency Fund (more on that later).
Save for Taxes (Really Important!)
As a freelancer, no one takes taxes out of your money for you—you have to do it yourself.
How much should I save?
- Save 20-30% of every payment you get into a separate pot.
- Pretend this money isn’t yours—it’s for the taxman.
Where does this go?
Use your business account to create a “tax pot” or open a savings account just for taxes.
Remember that the first £12,570 of earnings each financial year are tax free. The 2024 to 2025 tax year dates are 6th April 2024 to 5th April 2025.
Read this article on Income Tax Rates and Personal Allowance
Tools to Help
- Monzo’s Pots feature: Automatically set aside a percentage of every payment.
- Emma or Plum apps: These budgeting tools can track income and help with saving.
Track Your Income and Expenses
This sounds boring, but it’s actually really simple. Just keep a list of:
- Money coming in: What clients are paying you.
- Money going out: What you spend on work (like software, travel, or supplies).
Why?
At the end of the year, when you fill out your Self Assessment tax return, this list helps you show HMRC what you earned and what you spent.
How to track it
- Use a spreadsheet (Google Sheets is free and easy to share with your accountant).
- Try apps like FreeAgent, QuickBooks, or Xero for more automation.
- Monzo Business users can track expenses directly in the app!
Tip: Take pictures of receipts with your phone and upload them to your tracking tool.
What About a Pension?
If you’re thinking, “I don’t have a pension, and I’m already 28/30—is it too late?”—don’t panic. It’s never too late to start!
Here’s what to do
- Open a Self-Invested Personal Pension (SIPP). Think of this as a special savings account for your retirement.
- Start small. Even if it’s just £20 a month, it adds up.
How much should I save?
A good rule is to save a percentage of your income that matches half your age. For example:
- If you’re 30, aim to save 15% of your income for your pension.
- Can’t save that much? That’s okay—just save what you can.
Where to start?
- Vanguard SIPP is a simple, low-cost option.
- Nest Pensions (set up by the UK government) is another great choice.
- Speak to a financial advisor if you’re unsure where to begin.
Bonus: The government will add to your pension with something called tax relief. For every £100 you save, they add £25!
Build Safety Nets: Save for the Future
Freelancing is unpredictable, so you need some backup money for emergencies or quiet months.
What pots should I have?
- Emergency Fund: Aim to save 3–6 months of living expenses.
- Business Expenses Fund: Save for things like buying a new laptop or software.
- Runway Fund: If you want to take a break or try something new, this pot gives you breathing room.
Set small goals for each pot and build them up over time.
How to do it:
- Monzo and Starling’s “Savings Spaces” let you set up multiple pots.
- Apps like Moneybox round up your purchases and save the spare change.
When Should I Pay Myself a Salary?
As your business grows and becomes more profitable, you can start transitioning from taking random payments (owner’s draws) to paying yourself a salary. Here’s how:
Step 1: Set a profit target.
- Your business should consistently earn more than it spends before you pay yourself a fixed salary. A good rule is to have at least 3 months of business expenses saved as a buffer.
Step 2: Decide on a salary.
- Start with a realistic, modest amount that covers your personal needs and still leaves money for taxes and reinvestment in the business.
Example:
- If your business earns £3,000 a month and expenses + taxes cost £2,000, you could pay yourself £1,000 and leave the rest for reinvestment or savings.
Step 3: Automate it.
- Set up a standing order to transfer your salary from your business account to your personal account every month.
Think About Insurance
Insurance might sound boring, but it protects you when things go wrong. Here are some to think about:
- Professional Indemnity Insurance: Protects you if a client isn’t happy with your work.
- Income Protection Insurance: Pays you money if you’re too ill to work.
- Life Insurance: Helps your loved ones if something happens to you.
Where to look?
- PolicyBee specialises in freelancer insurance in the UK.
- Aviva offers flexible life insurance policies.
When to Hire an Accountant
If you’ve been managing your taxes on your own, you might wonder, “Do I really need an accountant?” The answer depends on your situation.
You might need an accountant if:
- You feel overwhelmed by taxes.
- Your finances are getting complicated.
- You want to save money on taxes.
- You’re earning more (over £50,000 a year).
- You don’t have time to deal with it yourself.
Final Thoughts
Freelancing can feel like you’re making it up as you go, but getting your finances in order doesn’t have to be hard. Start small, take it step by step, and focus on building good habits.
If you don’t have a pension, savings pots, or insurance yet, don’t stress. Start with what you can, and build it up as you go.
If you’re ever unsure, ask for help! An accountant or financial advisor can explain things and make sure you’re on the right track.
