Freelancer Expense Management: A Beginner’s Guide

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This article discusses how to manage expenses as a freelancer. Over the years, freelancing has become an increasingly popular alternative to the traditional full-time job. In 2020 2.2 million freelancers have worked across the UK and as a result of changing priorities and a greater need for work-life balance, this number will increase in the future. However, despite the benefits that freelancing can offer, such as flexible hours and increased work autonomy, it also comes with some major challenges.

One of the biggest hurdles new freelancers face is cost management and budgeting. Many people have very little experience with business cash flow and tax calculations when they first start self-employment, which can complicate the financial planning process. Fortunately, by implementing a few simple practices into your workday, you can manage your expenses and income much more effectively. This blog will introduce you to some of the key principles that will help you achieve financial stability as a new freelancer.

Plan ahead and keep a budget:

A budget is an integral part of managing finances as a freelancer. This will not only help you understand your annual income and expenses, but it will also allow you to better control your cash flow and, as a result, improve financial stability.

Create a budget:

The first step to budgeting is to calculate non-recurring expenses. These are the costs necessary to run your freelance business and may include Internet access, software subscriptions, website or platform fees, and rent. Although you can also include additional non-essential expenses in your budget, it’s best to separate them from the main list in case they are unavailable for some months.

Next, you will need to predict your income for the year. If you have been freelancing for a while or have done so in the past, you can use this data to predict how much money you are likely to make in the future. If you’re new to freelancing, use the information you have such as offered rates, expected hours of work, and any current clients to estimate your income.

Understanding your cash flow:

In theory, your budget should give you a clear idea of ​​what your cash flow will be on a monthly basis. However, as a freelancer, your income can vary greatly from month to month, meaning your forecast may not accurately reflect the reality of your financial situation. While the total income you earn may be about the same as your projections, you will likely experience peaks and troughs in work that will leave you with more than enough money in some months and very little in others. .

For this reason, it is essential to view your budget as a permanent work in progress that needs to be maintained throughout the year. Your budget will help you determine when you should save money and how much, helping you prepare for when things go wrong. Always have a cash reserve in case of unforeseen circumstances to cover basic expenses, as well as a separate fund that will go to taxes at the end of the financial year.

With accounting software:

The best way to save your budget and manage your finances is to use accounting software. Instead of manually entering your income into a spreadsheet and storing all your accounts in a folder on your desktop, let your accounting software handle all of your financial information automatically. Not only can this make managing your finances more efficient, but it also ensures that all of your calculations are accurate and that you are paying the correct amount of tax. Depending on the package you choose, you’ll be able to see your monthly income and expenses at a glance, as well as get detailed reports to help you understand your cash flow.

When comparing different types of accounting software, always think ahead. Some cloud accounting software vendors recognize that a freelancer’s needs may change over time, so you may have the option to upgrade your package. Instead of investing in a solution that might not fit your needs, opt for subscription-based software that provides more flexibility and can scale up or down.

Separate your finances with a corporate bank account:

If you go freelancing while earning a salary from a full-time job, it may not even occur to you to open a second bank account. But using the same bank account for business and personal expenses can quickly become confusing and make filing a tax return a much longer and more complicated process. By separating your bank accounts, you can quickly and easily identify which transactions are relevant to your business, giving you a clearer picture of your cash flows.

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

  • Fees: Unlike personal bank accounts, using business banking usually costs money. While there are a few free options, the vast majority of commercial bank accounts will require you to pay a monthly or yearly fee. The amount can vary considerably, but most freelancers can expect to pay around £5 per month for a basic account. However, some providers offer a free period when you first open your bank account. It can be anywhere from 12 to 24 months, so spend some time researching what offers are currently on the market.
  • Restrictions: Some corporate bank accounts will limit the number of transactions you can make within a set period, while others will have limits on the amounts you can withdraw or receive. This is unlikely to be a problem when you first start trading as your income is likely to be lower. However, if over time you expect to deal with large amounts of money, it is worth choosing a more flexible bank account.
  • Card payments: To ensure that your bills are paid as quickly as possible, it is in your best interest to choose a bank account that supports card payments as well as bank transfers. Many clients choose to pay by card because of the added security it provides them, and as a new freelancer, it can take a while to build trust. Card payments are also more efficient and usually process faster than bank transfers.
  • Currency: Freelancers working with international clients may need a corporate bank account that accepts and holds multiple currencies. This can help you avoid bad exchange rates and transaction fees that often come with sending and receiving money to and from different countries. If that’s what you like, always check with your banking provider to see what currencies they support.
  • Connected savings account: Some freelancers find it useful to open a business savings account along with a checking account. Not only does this allow them to set aside money to use during times when things are slow, but it can also offer a more competitive interest rate. Look for providers that offer linked checking and savings accounts to make it easy to transfer money.

Check out the tax laws:

Taxes can be tricky, but they are a key part of managing your finances as a freelancer. While accounting software can make it easier to file your tax return, it’s important to understand some basic rules to avoid penalties later on.

Most freelancers work as sole proprietorships rather than limited companies, especially when they are just starting out. If this applies to you, you must first register as a sole trader and create a self-assessment account that will allow you to file your tax return. You will only have to pay tax if your income exceeds your personal allowance of £12,570. Any money you earn above this amount will be taxed at the standard rate of 20% up to £50,270, after which your tax rate will increase to 40%.

To pay taxes, you must file the self-assessment form by the HMRC deadline, which is January 31, 2023 for online tax returns and October 31 for paper returns. What many aspiring freelancers don’t realize in their first year of trading is that their tax bills will be 50% higher than expected. This is because HMRC will require you to pay not only taxes for the previous year, but also half of the taxes you are estimated to pay next 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 you submit your first self-assessment, HMRC will sign you up for invoice payments, which means you will pay money into your tax account twice a year instead of once. This will make budgeting easier and reduce the burden of paying the entire bill at once. However, you must remember that this will be based on an estimate of your earnings. It is important to keep track of the actual numbers in case you earn significantly more or less than expected.

Related post: 5 reasons your business is asking for a freelancer


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