From the outside looking in, the world of a freelancer can seem like all fun and games. Freelancers set their own work schedule, they decide which projects to take on, and they’re in complete control of their earning potential. The reality of being a freelancer is a little different though.
When you work for yourself you take on the responsibility of managing your own financial affairs in entirety. Invoices aren’t dealt with for you. There’s nobody managing your taxes, and there’s no guarantee that you’re going to earn the same amount next month as you did this month. For all intents and purposes, you’re on your own!
Thankfully, it’s not all that difficult to get to grips with what you need to do as a freelancer to stay on top of your finances. If you get a feel for what you should be doing to make the whole process a little easier.
In our guide we’re going to cover the basics of managing your financial affairs when you go freelance. That means you never find yourself wondering whether everything is in order or if you’ve missed something important.
Should You Choose to Be a Sole Trader or Limited Company?
One of the first decisions that you’ll have to make as a freelancer is whether to establish yourself as a sole trader or a limited company. Your decision here will have a big impact on your financial affairs. As such, needs to be something that you decide before you register with HM Revenue and Customs (HMRC).
The different types of business structure will determine the tax that you’ll be required to pay. It also determines the amount of paperwork that you’ll need to fill in, and what kind of liability that you have as a business. There are benefits to each option. What might be right for one freelancer might not be right for the next. This decision is worth very careful consideration.
Registering yourself as a sole trader with HMRC means that you’re classed as self-employed with full ownership of your business. This is a very simplistic option with a straightforward structure. It is normally much easier to manage as a new freelancer as there is little paperwork involved. All you need to do to register as a sole trader is to contact HMRC. This is where you’ll be required to complete your self-assessment form.
Establishing yourself as a limited company is very different to setting yourself up as a sole trader. You will gain a legal identity. That means you’ll have limited liability, and tax can often be processed much more efficiently. This will increase your potential profit. As a limited company, your personal assets will also receive a greater level of protection. It can be harder to register as a limited company than as a sole trader. Essentially you’ll need to form a whole company, and register as such.
Bookkeeping as a Freelancer
Bookkeeping is the process of recording financial transactions on a daily basis. It is one of the most important areas of accounting as a freelancer. With the right bookkeeping skills, you’ll be able to easily keep track of your finances. You’ll get an overview of your financial situation when and as you need to. When it comes to the later stages of accounting, the effort that you put into bookkeeping will really start to pay off.
There is software available to help with bookkeeping. You can also hire professional bookkeepers to manage your records for you. These options can make the process much easier. But if you’re just starting out in the freelance world, then it can help to save money and keep your books in order yourself . This will give you a first-hand understanding of what it takes to keep tracks of your records as a freelancer.
Remember this is a legal requirement and not an optional extra.
It’s essential not to bypass this stage, as by law, it’s a requirement for all sole traders to keep their financial records in order. The rules and requirements of bookkeeping differs between limited companies and sole traders. As a limited company you’ll be required to keep company records and financial records. Records for a limited company will need to include details about:
- Loans, transactions, payment promises, and mortgages
- Shareholders, directors, and secretaries
- People with significant control (PSC)
- All accounting records
Everyone manages their books a little differently. However, there are some crucial bits of information that you’ll need to keep track of throughout the financial year. This will help when you’re preparing and examining your records to pay your tax. Here are some of the most important elements that you should make sure that you’re recording every day:
- How much you’re being paid per hour of work completed
- The total of your business expenses, including a log of all receipts
- The number of hours that you have spent working
- The payment amount and date of payment received from clients
- Any payments that you make
Tips for Managing Your Books
Bookkeeping may sound like a lot of hard work, but if you have the right system in place, it’ll become a part of your daily routine that you do naturally. Of course, it doesn’t hurt to make things easier where possible – here are our top tips for making bookkeeping a little simpler:
- Before the new financial year begins, make sure that your system is completely in order. You can keep track of most of your payments with ease by using a simple excel spreadsheet.
- Keep all receipts for important purchases in one place, so you don’t need to stress when it comes to offsetting them against your tax.
- Use a good accounting software to turn your standard bookkeeping into the type of figures and projections that you need to make sure your freelancing career succeeds.
- Take the time to go through your books and get a better understanding of the financial side of your work.
- Don’t leave recording your work until the last minute as you may miss out something important.
- Try to be as accurate as possible, trying to recall something months after the event can be a lot more difficult!
- Set up a daily schedule so you record the required details at the same time every day.
- If you don’t understand something, or you’re worried you’re not recording the right information, get professional advice sooner rather than later.
As we move onto an overview of accounting, it’ll start to become apparent as to just how important keeping good books really is.
An Overview of Freelance Accounting
Dealing with accounting is one of the most daunting tasks that many freelancers have to face, simply because for many, it’s completely new territory. While the territory may be new, it’s something that needs to be addressed competently to keep your new career as a freelancer in good order.
Accounting pertains to the preparation and examination of your records. This ensures that they’re accurate and in order so that you can pay your taxes correctly and on time. This task can be big or small, depending on how well you have kept your books over the financial year.
As a freelancer, you have two options when it comes to keeping your accounts. The first is to hire the services of a professional accountant, and the second is to handle your accounts by yourself. If you choose to hire an accountant then they can take care of invoicing, expenses, reports, and taxes, or any combination of your choosing.
However, even if you choose to hire an accountant, it’s important to get a general idea of the processes involved. There are a few things that you’ll need to do that your accountant can’t do for you. Having an overview of the account keeping process can help to provide clarity to your finances. This is of the upmost importance when you’re not earning a consistent income.
If you’re taking control of your accounts for the first time, then there are a number of key things that you’ll need to do, some of the most important of which, we’ll be covering below.
Opening a New Bank Account
While there is no problem using your personal account if you’re a sole trader. Having a business account can be incredibly helpful when it comes to managing your financial affairs a lot easier. Having a single account for all your client payments will streamline the process and help you to separate business expenses from personal expenses. You’ll also find that when the time comes to sort out your tax, having everything in one place is much easier!
When you’re managing your own accounts, staying organised is incredibly important if you want to avoid a tax-related headache at the end of every financial year. Most freelancers aren’t paid on a set day every week or month, and if you have a large number of clients, then you may even end up being paid every day or every couple of days.
The inconsistency of payment puts an even greater pressure on keeping track of your bookkeeping, because as a part of your accounting, you’ll likely have to:
- Manage your own cash flow
- Invoice clients
- Stay on top of payment schedules
- Provide proof of income
- Record received payments
- Keep VAT records, and PAYE records if you have employees
- Log your hours worked
- Keep track of profits and losses
- Chase up unpaid invoices
- Create cost and pay estimates
While at face-value this can seem like a lot to keep track of, if you stay organised and keep comprehensive records, then it’ll make the process of managing your accounts as a freelancer much simpler.
Choosing Accounting Software
The perfect middle-ground between handling your accounts solely by yourself and hiring an accountant, is using accounting software. There are a large number of options for accounting software, but you’ll normally find that the accounting software is:
- Able to track invoices
- Capable of handling complicated billing procedures
- Able to help you to track and manage expenses
- Free to try out
- Able to track cost estimates
- Easy to get to grips with
- Able to help you grow your freelance career
With the best accounting software, you can make sure that your income and outgoings are always in the green and get a better picture of your tax obligations and any outstanding payments. When you have everything recorded and tracked, you can also make sure that you bill clients as early as possible and speed up the time between work completed and payments made.
Working Out Your Expenses
As a freelancer, you’ll be able to claim a number of expenses that can be deducted from your profit amount before your tax is calculated. This is an important area of your accounting requirements to get right, both in terms of not missing anything that you can claim for and not trying to claim for something that doesn’t fall under the bracket of ‘allowable expenses’.
Thankfully, most standard costs that you’ll have to pay when running your business can be considered allowable, and if you get your expenses correct, your tax bill can be reduced considerably. Depending on your exact speciality as a freelancer, and what your job entails, your expenses will change.
There are a couple of ways that you can claim expenses; you can claim for a ‘trading allowance’, which has a value of £1000 and will cover all your expenses, or you can claim each expense individually, which is the best option if your expenses will exceed £1000. You can also claim capital allowances, for purchases you’ve made for sole use in your business, like business equipment.
Here are some of the main expenses that you may be able to claim for before your tax is calculated:
- Office space and the associated bills
- Staff salaries
- Travel expenses and food and drink
- Insurance and other financial costs
You can only claim for an expense if it’s in direct relation to your business. Where the lines to start to blur like with heating bills for an office at home, you’ll be able to claim for the amount of expense incurred solely for the business, such as bills for only heating the room your using for business. Working these divisions of bills out can get quite complicated, so it’s important to record each expense as and when it occurs.
When is VAT Required?
Registering for Value Added Tax (VAT) is something that you may have to consider if your freelance career is starting to really take off. VAT comes into play when a business turns over more than the threshold amount (currently £85,000) in a single financial year or is forecasted to earn more than that amount. A VAT return must be sent for each quarter of the financial year.
Some freelancers choose to register for VAT before they get close to the threshold, but it can mean that some big changes will need to be made to their processes and their records. When you register for VAT, you’ll need to:
- Charge your clients 20% VAT (current rate) when they purchase your services/products (needs to be added to invoices)
- Pay VAT when you purchase services from businesses
When you file your VAT return, one of two situations will occur, you’ll either owe the HMRC money or they’ll owe you money. VAT is worked out on the difference between the amount you charge and the amount you pay. VAT can change year-to-year, and there are different rates, known as the standard rate, reduced rate, and zero rate. You’ll also find that some purchases are exempt, like antiques.
There are also different schemes that are available in the UK to easily manage your VAT, such as the annual accounting scheme, that can make organising your VAT much easier. If you’re not close to a turnover of £85,000 per year, then VAT is not something that you’ll need to worry about, unless you choose to register for VAT earlier than what is required by law. This does have some benefits, like making your business appear larger, but there is a lot of added responsibility as well.
Filling Out Your Self-Assessment
All the hard work that you put in throughout the year to keep your financial affairs in order, pays off when it comes to completing your self-assessment tax return – the most important time of any freelancer’s year (when it comes to tax at least!).
A self-assessment form is what’s used by HMRC to collect your information for your income tax amount. This is an incredibly important form, as failing to produce it on time can land you will some pretty substantial fines and put you in hot water with the HMRC.
Any person that doesn’t have their tax covered by the Pay As You Earn scheme, is responsible for filling out the self-assessment, which is due after the end of the tax year (the current year began on the 6th of April 2018). There are then a number of deadlines imposed:
- 5th of October 2018 – Registration for self-assessment must be completed
- 31st of October 2018 – Paper tax returns must be sent
- 31st of January 2019 – Online tax returns must be filed
- 31st of January 2019 – Tax must be paid
- 31st of July – Advanced payments for the next tax year are due
If you don’t meet these deadlines, then the fines start to stack up pretty quickly, so it’s important to make sure that you’ve got your affairs in order by then.
If you’ve never filed a self-assessment before, then the process may seem a little alien, but it’s quite straightforward once you get into it. You’ll need to register with HMRC to recieve your self-assessment form which generally consists of 8 pages. To fill in the form you’ll require certain details, like your postcode, your National Insurance number, and your Unique Tax Payer Reference (UTR) which you’ll be able to request from HMRC.
When filling out your self-assessment, you’ll need to provide details of your finances, including:
- Your turnover
- Your net profit and loss
- Your taxable profit and loss
- Your allowable expenses and capital allowances
- Your National Insurance Contributions
- Other income
You’ll be able to fill out the form at your leisure once you register (up until the deadline), but if your accounting and bookkeeping has been kept in order, then it shouldn’t take too long to complete the form.
Once you have finished your tax return, you’ll know the amount of tax that is due and the amount of National Insurance that you’ll need to pay. All that’s left then is to make sure that the amount is paid on time!
Staying in Control of Your Finances
When you decide to go freelance, you gain a lot of responsibility over your own financial affairs, but you also get the freedom to manage your own work load and dictate your entire work schedule. Like any freelancing job, keeping on top of your finances is simply a case of managing your schedule and putting in a place a system that works for you.
After the first year of bookkeeping, accounting, and filing your taxes, you’ll be able to approach the yearly task like an old pro! If you want more information about the freelancing business then do read my new book Create, work, earn published in the Autumn 2018. If you pre order you’ll get £2 off the cover price.
James, Mark. “What’s the difference between a sole trader and a limited company?”
. 12 April 2016 [reviewed 2018].
Rivera, Kristian. “5 Ways to Remedy Your Freelance Accounting Headaches”
. 9 December 2016.
Smith, Kingston. “A Freelancer’s Guide to Expenses”
. 20 July 2011.