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Creating good financial habits as a freelancer

Yesterday was 31st January and a day when money was on the mind for lots of freelancers who needed to submit their Self Assessment tax returns. If you just finished your tax return at the last minute and have vowed to be more organised next year, you're not alone. 

I spoke to husband and wife financial dream team, Andy and Helen Fleet about how freelancers can get into good financial habits. 

Both agreed that planning in advance is key to developing a better relationship with your finances. Helen, who focuses on strategy and growth, recommends setting targets and working out what you need to set aside for the future. Look at the minimum amount that you need to earn, but also think about what your aspirations are for the year. If you set those out, then you have something to work towards.

Setting realistic targets

Until the middle of last year, I’d not set any targets and would be scrabbling around looking for money to pay the bills each month. After some business coaching with Michelle from Dive Deeper Development I had a set amount of income that I wanted to reach by April, and I’m currently on track to exceed it by £3,000.
— Katy Carlisle, Freelance Folk Founder

She suggests choosing targets that are realistic and aren't going to make you feel like you've failed. This can be especially relevant if you've come from a previously well-paid job, as you may not earn as much in your first year of freelancing as you did in employment. 

Don't forget to also include saving for tax in your planning. If you're freelance then you need to pay tax on the 31st January for the previous financial year (which ends on 5th April). For example, if you had started freelancing in May 2017, you would need to pay tax for the year ending 5th April 2018 by 31st January 2019. 

Many freelancers don't realise that if you earn enough in your first year then you need to be aware of payments on account, where you pay for the tax for the previous year and 50% upfront based on the estimate for future years. You'll also need to pay National Insurance contributions and potentially your student loan repayment too. 

Andy says that a good rule of thumb would be to set aside 15-20% of your income whenever you get paid, and put that in a separate account for tax savings, and then you'll also have a bit of a buffer for unexpected costs too. Many banks offer a linked savings account which you can use to put this money to one side.

This would obviously need to be a bit higher if you expect to cross over into the higher tax band as then you are taxed at 40%. rather than 20%.

It's also worth mentioning that every freelancer will have different income, expenses, tax codes and even other sources of money coming in. So the 15-20% is a useful guide to start with but to get a more accurate figure, speak to a professional.

Deciding how much to charge

We get asked about this all the time at our popup coworking sessions and when you're first starting out it can be so hard to choose the right pricing strategy. Helen points out that when you're self employed you're wearing all the hats, and in an average week you don't actually spend all of your time on delivering your service or making your products. There's admin, marketing, travel etc. so make sure that this is reflected in your pricing.

A strategy that Helen mentioned that has worked really well for me is tracking your time and thinking about the profitability of your work. Using a tool like Toggl can make this really easy and it's what made me feel much more confident about raising my prices as I realised that my business wouldn't be sustainable if I kept charging lower rates. 

She also suggests taking the time to reflect after you complete a piece of work. Did it take longer than expected? Was it an issue with your estimate? Was it that the client kept changing their mind and therefore the brief and scope needs to be clearer? That way you can identify ways to reduce financial "leakage" in the future. 

There’s always a trigger that makes people take the leap into freelancing, but they often jump straight in rather than taking a bit of time to stop and plan their goals for the upcoming year.
— Helen Fleet

Doing a monthly review of the jobs you've worked on and your profits, as well as looking at your expected cashflow, can help to identify potential problems and you can then tackle them before they start to have a more serious impact. Helen also recommends doing an annual forecast based on your targets, so you can identify how to reach your goals. 

An ongoing debate in the self employed community is whether you should ever work for free. Personally, I think that if you're clear on exactly how you benefit then it is acceptable to do free work sometimes. Helen agrees that it's a tricky issue, especially when it comes to doing work in exchange for the rather vague "exposure". On the one hand, you could allow yourself to do a set number of hours for free, and look at it as marketing budget. If you do this, she suggests setting clear boundaries, letting people know it's a one-off, and thinking about what you can get in return, beyond money. Could you ask for an introduction to a useful contact or swap skills, for example?

However, she points out that you should consider whether it's stopping you from doing something else that could grow your business. I've also found (both from personal experience and from talking to other freelancers) that when you work for free, the client tends to value your work less. It's the same reason why people don't turn up to free events; they have less at stake and it's not as much of a commitment for them. 

Keeping on top of your spending

As a freelancer you are taxed on your income minus your allowable expenses so by regularly reviewing your purchases you can ensure you're not paying more tax than you need to. By leaving it until the last minute you're more likely to miss out on an expense that you can claim for, or realise that you no longer have an important receipt as evidence. Andy suggests a monthly review of your finances, but added that if you have a tendency to procrastinate then a short weekly burst might be a better option! That way, you also get into more of a habit. 

There are a number of apps and services that can help you to manage your freelance finances. I really like Wave, which is a free accounting tool that allows you to create branded invoices that can even be paid online with a credit or debit card. They also have an app where you can take photos of your receipts so that you have the evidence digitally. Andy explains that keeping digital records is absolutely fine, as long as you can show the corresponding bank transaction in your account (to prove that you've not just taken a photo of someone else's receipt). He also advises paying by card rather than cash wherever possible, again so that you have a more specific record of your spending. 

Many freelancers use their own personal account for their business income as well, but it's worth checking your bank's terms and conditions as some don't allow you to use those accounts for commercial purposes. I found that it was easier to set up a business account to keep my work transactions separate, and if you do choose to go down this route, there are a number of high street banks which offer free business banking for the first 18 months. Some charge a set monthly fee and others charge based on the number of transactions going in and out of your account, so it's worth doing a comparison to see which works out at better value for you. 

If you're looking for a more innovative and modern way to bank, you might also be interested to know about Coconut, a mobile app and current account specifically designed for the needs of freelancers. I went along to their launch party last night and am really excited about their features, which include automatic categorisation of transactions and live tax estimates.

The app will even remind you to upload a photo of your receipt! They're launching for iPhone users first, with Android following later in the year and you may also want to join their Facebook group, where they are really active in asking for feedback and ideas on improvements and new features. 

Understanding what you can claim for

There can be a lot of confusion around what counts as an allowable expense, especially as the rules are different depending on whether you're self employed or a limited company.

One common misconception is that sole traders can claim for the cost of food and drink if they're working from a café, whereas this isn't actually allowed, as HMRC argue that you can't separate out what's for personal and what's for business use.  The exception is that you can claim for meals on overnight business trips. Andy adds that whilst you can claim for business travel, you can't claim for travel between your home and your place of work. Of course, for those of us who work from home, this isn't exactly a costly commute!

It’s amazing how often people listen to a guy down at the pub who said you could claim for things that aren’t allowable expenses. This is someone with no accounting knowledge!
— Andy Fleet

Speaking of working from home, you can also claim for some expenses relating to using your home as an office. You can either claim a set amount based on the number of hours that you work from home, or you can claim for a percentage of household costs (such as rent or interest on your mortgage, electricity, gas, water, insurance and council tax) by calculating the proportion that is used for your business.

Andy recommends that if you have a dedicated room that you use as an office, then divide that by the total number of rooms in your house (don't count bathroom, landings or hallways). For example if you have six rooms, you could claim for one sixth of the household costs. You probably don't use it 100% as an office, so you may want to then claim for say 95% of the cost, especially as if you did use it 100% as an office you could be liable for capital gains tax if you sell your home. If you don't have a dedicated room, do the calculation based on the floor space you use as a percentage of the total space. 

If you want to claim for the use of a car, Andy explains that as with the use of your home as an office, you have two options. You can either claim for the car costs (such as petrol, insurance, road tax etc.) as a percentage based on business vs personal use, or you can do a mileage claim which is 45p per mile for the first 10,000 miles and 25p after that. It's therefore worth thinking about which would be most beneficial for you. For example, if you have a really efficient car that doesn't cost much to run, claiming for mileage may be better. With either approach, you need to keep a mileage log for business trips, which includes the date of travel, mileometer reading at the start and the end of journey, where you went and who you went to see. 

The GOV.UK website has more information on what you can and cannot claim for, but if you're at all unsure, it does pay to speak to someone who knows what they are talking about. 

Choosing the right accountant

If you do decide that you need a bit of extra help, the first step is to ask for recommendations as not all accountants are created equal. Don't pay for more than you need, and make sure that they do understand your circumstances. If you can, arrange a meeting or call with them to get a sense of how they work and their attitude, and don't feel like you have to go with the first person you meet if you don't feel they are a good fit.

Larger accountancy firms can offer competitive deals, but just make sure that you don't get neglected in favour of their larger clients. You can also look for an accountant who is regulated (they will probably mention CIMA, ICAEW or ACCA) as these regulatory bodies have a code of ethics and standards to follow, so if you have any problems you can take the issue up with them. 

Another advantage to having an accountant is that they will need the information well in advance of the tax return deadline in order to do a good job, so if you know you work best when you're accountable to someone else, then it could be a good option for you. 

Planning for growth

A lot of people that I meet at our coworking sessions are "lifestyle freelancers" who are quite happy being a one man (or woman) band and don't especially want to grow by taking on employees. But if you do want to grow, Helen recommends deciding what the trigger points will be. Her advice is not to wait until you need to turn work away; instead it's better to get the right person in advance, which means that you need to have the money in place beforehand. The right level of experience for your new hires is important too, for example do you need a partner or a junior?

There are also other ways to grow beyond taking on a team of permanent staff members; within the freelance community there is a huge range of skills that can be used to support you with your business, and collaborations between freelancers are becoming more common.

If you want to get an insight into how other freelancers manage their finances, check out the Being Freelance podcast from Steve Folland. He features self employed people from around the world and they often talk quite candidly about their relationship with money and how they've grown their business. 

And last year, IPSE (the association for freelancers) launched their own money magazine which covers subjects such as savings and mortgages for freelancers. They are also a great source of general advice and support if you're self employed. 

Limited Company or Sole Trader?

Most of the information here relates to people who are self employed (also known as sole traders). If you think you might want to set up as a limited company, do speak to an accountant to get an idea of what's best for you, as the rules around dividends have recently changed so it's a less tax efficient option than it was previously in that respect.

There are advantages to both options too. For example, being a limited company means that you aren't personally liable if something goes wrong in your business, and it keeps your business assets separate to your personal ones. And whilst you can do your own tax return if you're self employed, you will almost certainly need an accountant if you're a limited company, so make sure to factor in that cost to your budgeting. 

Andy Fleet runs a no nonsense accountancy firm that offers support for both limited companies and sole traders. 

www.ajfleetandco.co.uk

Helen Fleet focuses on financial strategy to help businesses to improve their profits and achieve their goals. 

www.helenfleet.co.uk