A Beginner’s Guide to Managing Expenses as a Freelancer

by / ⠀Finance / April 29, 2022
Managing Expenses

Over the years, freelancing has become an increasingly popular alternative to a traditional full-time job. In 2020, 2.2 million freelancers were working across the UK and, as a result of changing priorities and a greater need for work-life balance, this number is set to increase in the future. However, despite the benefits freelancing has to offer, it also comes with some significant challenges, such as managing expenses.

One of the biggest obstacles faced by new freelancers is expense management and budgeting. Many people have very little experience with business cash flows and tax calculations when they first become self-employed. This can make financial planning a difficult process. Fortunately, by implementing a few simple practices, you will be managing expenses and income much more effectively. This blog will introduce you to key principles that will help you achieve financial stability as a new freelancer.

Plan ahead and maintain a budget

A budget is an indispensable part of managing finances as a freelancer. It helps you to understand your yearly income and expenses. It also allows you to have better control over your cash flow and, as a result, enjoy improved financial stability.

Creating a budget

The first step to budgeting is calculating your non-negotiable expenses. These are costs that are necessary to the running of your freelance business. These may include internet access, software subscriptions, website or platform fees, and rent payments. While you can include additional, non-essential expenses in your budget as well, it’s best to separate these from your main list. This is just in case there are some months when they are unaffordable.

Next, you will need to forecast your income for the year. If you’ve already been freelancing for a little while or did so in the past, you can use this data to predict how much money you’re likely to earn in the future. If you’re brand new to freelancing, use the information you do have available. These are items such as your proposed rates, expected working hours and any current client leads, to estimate your income.

Understanding your cash flow

In theory, your budget should give you a solid grasp of what your cash flow will be on a monthly basis. However, as a freelancer, your income can vary dramatically from month to month. Your forecast might not accurately represent the reality of your financial situation. While the total income you earn might be roughly the same as your predictions, you’ll likely experience peaks and troughs of work. This can leave you with more than enough money in some months, and very little in others.

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For this reason, it’s crucial to see your budget as a constant work in progress. Budget needs to be maintained throughout the year. Your budget will help you to identify when you should save money, and how much, helping you to prepare for when business is slow. Always have an emergency pot of cash that can be accessed. This is to cover basic expenses as well as a separate fund that will go towards taxes at the end of the financial year.

Using accounting software

The best way to maintain your budget and manage your finances is by using accounting software. Instead of manually inputting your earnings into a spreadsheet and storing all of your invoices in a folder on your desktop, let accounting software automatically process all of your financial information. This will make managing expenses more efficient. It will also ensure that all of your calculations are accurate and that you are paying the right amount of tax. Depending on the package you choose, you’ll be able to see your monthly income and expenses at a glance. In addition, it will pull detailed reports to help you understand your cash flow.

When comparing different types of accounting software, always think about the future. Some cloud accounting software providers recognise that a freelancer’s needs might change over time. Which is why you might have the option of upgrading your package. Rather than investing in a solution that might not be right for your needs, choose subscription-based software that offers more flexibility and can be scaled up or down.

Separate your finances with a business bank account

If you’re transitioning to freelancing from being paid a salary at a full-time job, opening a second bank account might not have even occurred to you. Using the same bank account for your business and personal expenses can quickly become confusing. It can make filing your tax return a much longer, more complicated process. By separating your bank accounts, you’ll be able to quickly and easily identify which transactions are relevant to your business. In turn, giving you a clearer understanding of your cash flow and assist in managing expenses.

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Factors you should consider before you choose a business bank account include:

  • Fees: Unlike personal bank accounts, business banking services usually cost money to use. While there are some free options, the majority of business bank accounts will require you to pay a monthly or yearly fee. The amount can vary significantly, but most freelancers can expect to pay around £5/month for a basic account. Having said that, some providers offer a free period when you first open your business bank account. This can be anywhere between 12 and 24 months, so spend time researching what offers currently exist across the market.

  • Limits: Some business bank accounts will limit the number of transactions you can make within a set period, while others will have caps on the amounts you can withdraw or receive. This is unlikely to be an issue when you first begin trading, as your income is likely to be lower. However, if you anticipate dealing with high volumes of money, it’s worth choosing a more flexible bank account.

  • Card Payments: To make sure your invoices are paid as quickly as possible, it’s in your best interest to choose a bank account that supports card payments as well as bank transfers. Many clients prefer to pay by card due to the added security it affords them. As a new freelancer, it can take a while to build trust. Card payments are processed more quickly than bank transfers and are more efficient 

  •  Currency:Freelancers that work with international clients may need a business bank account that accepts and holds multiple currencies. This can help you to avoid poor exchange rates and transaction fees that often come with sending and receiving money to and from different countries. If this is something that appeals to you, always check with your banking provider to confirm which currencies they support.
  • Connected Savings Account: Some freelancers find it helpful to open a business savings account alongside their current account. It not only allows them to keep money aside to use when business is slow but may also offer a more competitive interest rate. Look for providers that offer interconnected current and savings accounts to make transferring money easier.

Familiarize yourself with tax laws

Taxes can be complicated, but they’re a key part of managing expenses as a freelancer. While accounting software can make filing your tax return easier, it’s important to understand some basic rules so you can avoid incurring fines further down the line.

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Most freelancers operate as sole traders rather than as limited companies, especially when first starting out. If this is the case for you, you’ll need to first register as self-employed. Then, create a self-assessment account that will allow you to file a tax return. You will only have to pay tax if your income exceeds your personal allowance of £12,570. The standard rate of 20% up until £50,270 will be taxed on any money you earn over this amount , after which your tax rate will increase to 40%.

To pay your taxes, you must submit a self-assessment form by HMRC’s deadline. The deadline is 31 January 2023 for online tax returns, and 31 October for paper returns. What many first-time freelancers don’t realize is that their tax bill will be 50% higher than expected. HMRC will require you to pay not only your previous year’s taxes, but half of the taxes you’re estimated to owe in the following year. For this reason, it’s important to plan ahead and set aside enough money to cover more than just the taxes you currently owe.

After submitting your first self-assessment, HMRC will sign you up for payments on account. This means you will pay money towards your tax bill twice a year instead of once. This will make managing expenses easier and will reduce the burden of paying your entire bill in a lump sum. However, you need to remember that this will be based on an estimate of your earnings. It’s important to keep track of the actual numbers in the event that you earn significantly more or less than expected.

About The Author

Olivia Johnson

Over the past year Olivia has worked as a copywriter and content marketing executive for a multitude of companies from startups to household name companies.


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