Financial tips for the self-employed
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There are many attractions to being your own boss but, as any self-employed worker will tell you, being the boss of your own money is a must.
The impact of the Covid-19 pandemic means that more people are now working freelance or setting up on their own at the start of their careers — by choice or by necessity. Whatever your line of work, staying on top of your freelance finances is crucial. Still, many struggle to find the time. Here are the key points to help you get started.
What’s the day rate?
The first question for a new freelancer is how much to charge. And the best way to find out is to research what, and how, others charge for their work. Networking groups for your specialism are particularly valuable for this.
However, you must also work out what you need to survive, and whether this is realistically achievable. Start with your personal finances, and run through your budget. How much do you need to make each month to cover your costs? As a bare minimum, what would this equate to as a “day rate” — and how does that compare to what others say they can achieve?
Remember, you will need to pay tax on freelance income — look for a simple online tax calculator to help you work out the likely amount. Rules vary according to geographic location, but some companies deduct basic tax at source.
You should also plan to build a cash savings buffer. If you do not have a regular income stream, you really will need this safety net for the leaner months.
As well as cash reserves for emergencies, the self-employed should also think about pension saving, although few find it easy to put money aside. The basic problem is that pensions tend to be inflexible: once you pay the money in, it could be locked up for decades. But you may receive tax relief on anything you can save.
Don’t work for free
Sadly, some clients interpret the “free” in freelancer a little too literally. Be very wary of those who expect you to work for nothing, simply in order to “get the exposure”.
You should always talk about the money before accepting the work. These conversations can be awkward, but they are necessary — and having a firm grasp of your day rate will help.
Anne Boden, founder of Starling Bank, recently reinforced this point on the FT’s Money Clinic podcast. She said: “It’s a particular issue with women in that they tend not to be prepared to say, ‘I am worth X amount per day; I’m not prepared to have that conversation with you for free; and I’m not prepared to have that coffee so you can just pick my brain’.” So take a leaf out of her book and say: “I’m a professional, this is my fee, I am worth it. And this is what I’m going to charge.”
That is the easy part — the hard part is actually getting paid, which can be tortuous. Some clients will require you to register as a supplier; others require invoices to be completed in a specific way with codes and reference numbers. My advice is make friends with the accounts people at businesses you do a lot of work for.
Keep it separate
One of the biggest challenges for self-employed people is keeping their business earnings separate from personal finances. But doing so will make it much easier to keep track of cash flow and to chase overdue payments — the bane of any self-employed worker’s life, not to mention filing annual accounts and tax returns.
Be aware that some banks charge fees for business accounts; digital banks tend to be the cheapest and have the best apps. You do not need to start your own company to qualify — most banks accept applications from sole traders (those who work for themselves).
For those combining employment and freelance work, it is usually possible to have a full-time PAYE job and register as self-employed for freelance earnings. My system is to set aside a percentage of any freelance income I generate and put it into Premium Bonds. I may win a tax-free prize while I wait to pay my tax bill.
App or an accountant?
Generating invoices and dealing with receipts, expenses and tax bills makes it worth setting up some kind of admin system. At the most basic, this could be a spreadsheet, but there are a growing number of apps — free and paid for — that will streamline the process.
That is fine while you are starting out, but could an accountant provide something that an app could not? “Apps are great at collecting data, but what they can’t do is guide you as to what that data means,” argues Nimesh Shah, chief executive of accountancy firm Blick Rothenberg, which has nurtured many start-ups.
The first thing he looks at with start-up clients is the level of cash flow — the lifeblood of any business — and whether they are growing too quickly. “Apps can tell you how much tax you’ll need to pay, but they don’t necessarily tell you about tax allowances,” he points out. In fact, accountancy fees may be one of your tax-deductible items.
Find the right structure
Most freelancers start as sole traders but, in time, they may need a more corporate structure.
Some clients will deal only with limited companies or partnerships. Depending on your line of work, you might want a company structure that protects you from future legal claims — in the UK, this would be the formation of a “limited” company.
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Such a move would require the help of an accountant. This will increase your admin costs, but remember that businesses can often claim more generous tax allowances.
Accountants will ask new business owners questions about the right structure, and challenge their thinking on this, says Shah.
“If you’re an entrepreneur starting a business with the idea of one day selling it . . . getting this advice early on can save you a fortune in legal bills further down the line,” he explains.
The writer is the FT’s consumer editor and presenter of the FT’s Money Clinic podcast; Follow Claer on Instagram @ClaerB