Going freelance? The essential guide to your finances

The number of people who are self-employed in the UK has been rising quickly, from around 12% of the workforce in 2001 to 15% in 2017 (source ONS). New tax laws to change the status of some of these workers were expected to halt the rise, but redundancies caused by Covid are likely to result in another leap. 

Woman on laptop

If you’re considering going freelance, what are the key financial considerations?

Before you make the leap

A freelancer (or contract worker) does not have the legal protection and security of income of an employee. This will impact on your ability to take out loans or mortgages (or even secure a rental agreement). If you are considering doing any of these things, it’s a good idea to finalise them before you leave employment status. With mortgages, you typically need to show at least two years’ accounts, with a very healthy profit, and even then you can expect to pay higher interest rates. 

Legal status

As a freelancer, you will, in effect, be setting up a one-person business. Most freelancers will either work as sole traders or limited companies:

  • Sole trader – Under this structure, you are solely responsible for the company’s debt and you pay tax through self-assessment. 
  • Private limited company – This creates a separate legal identity for your business, so you have to have distinct finances. The company pays corporation tax on profits, you get paid mainly through dividends. 

Some organisations will only deal with limited companies. That’s because limited companies are required to adhere to Companies House regulations and publish details of their directors, registered address, and summary accounts. It is also possible to work through an umbrella company.

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Tax – when is a freelancer not a freelancer?

You need to be aware of IR35. It is a tax rule that aims to end the practice of employees being forced (or volunteering) to register as self-employed in order to pay less tax and for the employer to avoid the legal and financial commitments of having someone on PAYE. The definitions of when a freelancer will be considered an employee are still evolving. However, the typical tests are around the number of customers you have and how you’re treated (eg. can you send someone else to do your job? Are you required to work from the client’s offices or set hours? How many days a month do you work for the client?).  

If HMRC believes that an employer is claiming that someone is a freelancer when they’re actually an employee (by these definitions), the employer will be fined. This is the reason you may find that some clients, who intend to use you regularly, will want to put you on payroll. 

Tax – what you pay

You’ll have to register with HMRC for tax purposes (and to pay national insurance contributions). The good news is that you can easily complete this online. Everyone is entitled to a personal allowance. This is an amount on which you pay no tax and applies unless you are a very high earner. The standard personal allowance is £12,500 per year (this changes with every budget and according to your personal circumstances).  

You are also entitled to deduct expenses from your tax bill. In effect, the expenses are added to the personal allowance and you only pay tax on income above that amount. Claimable expenses include professional fees, tools for your job, travel to meetings (maximum of 45p per mile if travelling by car), refreshments bought when out working and a contribution towards your housing and utility costs (if you work from home).  

Accountants will normally recommend that you pay yourself your personal allowance as an income and claim the rest from the profits of your business (dividends). This is because the tax on profits has historically been lower than income tax.  


If you expect to invoice for £85k or more a year (this includes chargeable expenses) you must register for VAT. You then need to add 20% VAT to all your invoices and submit VAT returns every quarter or you will be fined (heavily). However, if you’re registered for VAT you can claim back VAT on anything you buy for the business. That can make things like laptops and other tools cheaper.  

man and woman looking at finances

Business account

As a limited company, you have to have a separate bank account for your business. If you’re a sole trader it’s not a legal requirement, however, it is highly recommended that you do. It will make it much simpler to separate out business expenses and your accountant will not have to trawl through your personal expenses, which is time-consuming (so, expensive) and can feel like an infringement of your privacy. 


You’ll need protection against things such as theft of tools and accidents. You also need liability insurance, covering you in case you cause harm to your customers. You might also want to consider insuring your income (although that will be very expensive to obtain in the early days). The level of cover and policy will depend on the sector you work in. It is well worth getting a number of quotes as costs can vary and do remember to read the policy documents carefully. Cheaper is not always the best option.

Deciding on your fees

Write down all your annual costs (personal and business-related) and make sure you include spending money. Add 20% (for savings to take you through the lean times). That will give you the amount per year you need to earn after tax has been deducted. If you assume tax (including NI contributions) at around a third of your income, adjust by that amount to give yourself the total before tax.  

Divide that total by 11 and that will tell you how much income you need per month and the monthly total by 20 to give you an idea of your minimum daily rate. Dividing it by 11 (instead of 12) ensures you factor in holidays. Some freelancers make the mistake of thinking they don’t need holidays. It is a false economy; you will soon burn out without time off. 

In pricing, you will also need to consider other factors, such as market rates and how you want to be perceived (eg. cheap and cheerful or high-level expert). However, this calculation will ensure you know what you need to earn a living. 

iPhone calculator

Managing cashflow

Every month work out roughly how much tax you owe and put that and your VAT to one side in a savings account. That much is essential.  

Even the most skilled freelancers will have time when the work dries up (who could have predicted Covid?). It is, therefore, good practice to build up your savings so that you can survive the leaner times. Six months’ worth of income is a good target.

Some clients will take longer to pay you than others. Focus your time and energy on the clients who pay promptly and stop working with late payers as these are the ones that will default. If you do have a defaulter the government’s online Moneyclaim system for debts under £10k is cheap and easy and will usually get people to pay up as the debt will be enforced through the courts.

Managing your accounts

In our research over the summer we discovered that over a third (34.6%) of all micro-businesses had forgotten to invoice a client. For 50% of these business owners, the amount lost was at least £250 and nearly 8% reported that they’d lost at least £1,000. Being disorganised is therefore a very quick route to bankruptcy.  

If you’re not good at this yourself it will be cost-effective to employ a bookkeeper at an early stage (even for a few hours a month). Your bookkeeper can send out invoices, chase payments, and ensure that the books are ready for handing over to an accountant to submit tax returns. 

HMRC are mandating digital accounting, which means your books will soon have to be available in a digital form. This sounds like an added burden but actually, it will save you hours and ensure you keep on top of tax. There are numerous easy to use software solutions that charge a small fee per month and will give you complete up-to-date visibility of your accounts. Apps like Amaiz’s combine a payment account with automated bookkeeping so they really do make life much easier.

Good luck!

If you’re looking for support from a coach when it comes to finances or starting a business, use our search tool to find a coach today

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Written by Steve Taklalsingh
Steve Taklalsingh is the Managing Director at Amaiz (UK).
Written by Steve Taklalsingh
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