Accounting Small Business Advice

How to manage your money as a freelancer

4 Jun 2020

Managing your finances can be a bit of a minefield when you’re a freelancer.

According to the latest figures, there are 4.8 million freelancers working in the UK in 2018. If you’re thinking about joining their ranks, we strongly advise you take the time to understand how to stay on top of the financial elements of your new business venture, as outlined in this article.

As a small business accountant, our team are specialists when it comes to working with freelancers and have a wealth of knowledge to offer clients when they’re trying to get their own business off the ground - there is no question we haven’t faced or task we haven’t helped our clients overcome.

Are you stepping out into the world of freelancing, or have an established freelance gig(s) but need some expert advice or assistance? Get in touch to discuss how we can help, or try our instant quote tool and get a competitive fee in just 5 clicks.

Have a plan for your irregular income

Start by projecting your minimum income and expenses in order to create a feasible budget for your business.

You can work out your average by adding together your yearly income and expenses, then dividing this figure by 12 to establish your monthly budget. Or, use the month in which you earned least as a benchmark for income, and the month that you spent the most as an indicator of monthly expenses.

Make sure to include business costs (such as taxes and any licensing fees) you may need to pay in your overall expenses estimate.

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Income tax when self-employed

When you’re self-employed, you pay income tax on your profits, not your total income.

To work out your profits simply deduct your business expenses from your total income. This is the amount you will pay income tax on.

The amount of income tax you pay on your profits is the same as if you were employed.





Personal allowance: 0%

£0 to £12,500

£0 to £11,850 you will pay zero income tax on your profits

£0 to £11,500 you will pay zero income tax on your profits

Basic rate: 20%


£11,851 to £46,350 you will pay 20% tax on your profits

£11,501 to £45,000 you will pay 20% tax on your profits

Higher rate: 40%


£46,351 to £150,000 you will pay 40% tax on your profits

£45,001 to £150,000 you will pay 40% tax on our profits

Additional rate: 45%

Over £150,000

Over £150,000 you will pay 45% tax on your profits

Over £150,000 you will pay 45% tax on your profits

Remember, the rate is only applied to the profit between the brackets, not your whole profit. So, assuming you take the full standard personal allowance, if your profit is £50,000 in the 2018/19 tax year you will pay:

  • no tax on £11,850

  • 20% tax on £34,499 (difference between £11,851 and £46,350)

  • 40% tax on £3,649 (amount over £46,350)

Schedule payments

Whenever possible, confirm your payment schedule in the client contract.

Clients may prefer an alternative date for their own accounting purposes, but establishing this in advance can help you stabilise your cash flow.

If you are conducting a larger project, include milestone payments within the contract. You can discuss arrangements based on hourly payment, or on reaching a specific stage of the project.

Include a regular salary for yourself in your business plan, but pay essential business expenses first so that your business costs are covered.

Maintain an emergency fund

Freelancers should maintain an emergency fund to cover basic expenses when there is no other source of income.

Holding an amount equivalent to three to six months’ worth of bills and expenses can help you manage on an irregular income. With this contingency, you get scope to choose the jobs that you want and don’t need to get overly concerned by late client payments.

Separate your business and personal accounts

As a freelancer, it’s possible to use the same account for personal use and business expenses.

But, this can confuse things, and may lead to you inadvertently using business finances to cover personal costs.

It also makes things harder when it comes to submitting your self-assessment tax return, as business payments would need to be extrapolated from personal transactions. It’s therefore recommended that you maintain separate business and personal bank accounts.

With these accounts, set up recurring payments for your regular outgoings to get a better idea of your overall cash flow. Bank transfers can be set up for costs relating to:

  • Taxes

  • Travel expenses

  • Conferences/training

  • Salary

  • Pension

Switch to cloud accounting software

You’ve probably chosen to go freelance in order to earn a living from one of your skills, not to spend all your time monitoring your finances.

Cloud accounting software such as Xero can help you manage an irregular income by providing an at-a-glance cash flow overview. This enables you to make strategic decisions when they matter most.

Xero both comes with a host of automated features that can help you with invoicing, tracking expenses and submitting your self-assessment tax return.

The software can even be synchronised with a cloud accountant like Accounts and Legal, giving you the chance to receive expert advice on freelance cash flow management.

In fact, as one of Xero’s few platinum partners, we will be joining them at She’s On The Money’s “Freelance Finance Freak-out!” on January 22nd in London. Join us on the day as awe discuss how you can ge the very best from your freelance endeavours - tickets are available here.