How to help manage your money as a freelancer

Many people are rethinking their approach to work and joining the large community of freelancers in the UK. If this sounds like something you are interested in pursuing, there are a few things to consider.

The Great Resignation, also known as The Big Quit, is upon us. In November, it was reported that almost one in four UK workers plan to switch up their jobs within three to six months. What people are doing next is still to be decided, but some are opting for the flexibility of freelance work. Currently, the UK is the second-fastest-growing freelance market.

So, if you feel that you’d like to make the shift to freelance life, here are some of the basics that you should consider when it comes to money.

Name your price

One of the most important steps to freelancing is setting your rates, i.e. how much you charge clients for your work. You should look at how much you need to cover all of your basics as a minimum. When calculating your daily rate, you might want to set it as your annual salary plus 30% (this accounts for things like sick days, holiday pay or other employed perks) then you divide this by 220 (or the number of days you think you'll be working, after allowing for holidays and quiet periods between jobs). Here's an easy sum – although if you are registering for VAT, remember to add an additional 20%:

(£Your annual basic salary +30%) / 220 days

Another way to help ensure your rate reflects the market is to ask others in your field how much they are charging. This helps get an idea of the range in your industry. You can also set your rates based on time, value-add or project but most stick to standard hourly or daily rates.

How to spend it

Before beginning the freelance journey, aim to save 2–3 months of expenses, so you have the time and space to settle into this new way of working. As finances can be unpredictable – late invoices, paperwork and unexpected costs – having a buffer can ease money anxiety around quiet periods. The bane of freelancers' lives is late payments. Research by IPSE found that freelancers spent 20 days chasing invoices, with 50% of people writing off at least one piece of unpaid work. Though it feels demanding, don’t be afraid to charge late fees. Late payment legislation allows freelancers to claim interest on unpaid invoices; this is set at 8% plus the Bank of England base rate.

Once the money is hopefully rolling in, it’s essential to understand how to manage it. First things first, keep business and pleasure separate – always. Start by opening a business account that you have all invoices paid into and use it for business expenses and subscriptions. When it comes to taxes and National Insurance, things get very confusing, but guidance suggests that you aim to save about 30% of your invoices (if you're invoicing over £50,000 you'll likely need to put aside more). Trying to do this manually can get confusing, so you might wish to experiment with business accounts that include automated pots so you can ringfence your taxes as soon as you are paid.

Budgeting

One of the most complex parts of freelancing is budgeting, as your income may not be consistent. You may want to pay any bills annually rather than monthly, so that if your income ebbs and flows, these bills will have already been taken care of.

Unlike some full-time jobs, you aren’t guaranteed a pension unless you create one yourself. (You may be eligible for the State Pension but check the criteria and whether this is enough money to live on). You can use an investment company or bank to create a pension-investment pot that you pay into when you have money come in. As well as getting a pension together, start to build up your emergency fund if you don't already have one. If you need more concrete support on growing as a freelancer, groups like The Association of Independent Professionals and the Self-Employed (IPSE (Opens in new window)) provide community and protection to their members. Their website has extensive information on protecting and sustaining yourself as a freelancer.

Freelancing can be a liberating way to work on your own schedule and pursue your passions. Although the organisational aspects can sometimes feel a bit overwhelming, there are resources available, and with a bit of planning and research, you can make the leap and be your own boss.