Whether you’ve been dreaming about being your own boss for years, or are just developing your business idea, it’s vital to consider how a shift to self-employment could impact your finances.
The unpredictable nature of being a freelancer means there will be times when work comes flooding in and times when it dries up. Riding the wave of uncertainty will be the secret to your success.
Use these five tips to start your freelance journey on a firmer financial footing.
1. Time it right
Wanting greater flexibility is one of the reasons many workers choose to leave employment. For others, redundancy creates an opportunity to redesign their working lives. But whatever the catalyst, the financial uncertainty of working for yourself can be stressful – particularly if other people depend on your income.
DO: Think about personal and family milestones that will impact how reliant you’ll be on a guaranteed monthly income. Some parents wait until their child has started school when the cost of childcare eases. Others prefer to stick with traditional employment until their children are grown up.
“When my son had finished full-time school I felt I could give myself the freedom to go freelance,” says business psychology consultant Alison Hardingham. At the time, she was a single mother, so leaving the security of her job felt “quite risky” until her son was through school.
DON’T wait for the perfect moment – it might never come. There’s no ‘right’ time to go freelance, just as there’s no ‘right’ time to have a baby or take your first step on the property ladder, though these may be goals you want to tackle before, or after, starting your own business. Clarifying your financial responsibilities and ambitions can help you decide when the time feels right for you.
2. Tighten up your budget
A strong budget is the first step to building financial resilience, enabling you to work out the minimum income needed to cover your essential costs and where you could reduce spending if money gets tight.
DO: Review your current outgoings, assessing which are ‘needs’ and which are ‘wants’ that could be cut if freelance work was thin on the ground. If you’ve never made a budget before, try the 50:30:20 method.
DON’T mix up your personal and business expenses as this can cause hours of extra admin when it comes to filing your self-assessment tax return. Though it’s not a legal requirement for sole traders to have a business bank account, separating your household finances from money moving in and out of your business is an important early step. Even if your business is currently a side hustle and your bank permits you to use your personal bank account, a business bank account can make life easier when it comes to managing your cash flow.
If you’ve not yet opened a business bank account, compare traditional high street banks and app-based challenger banks to decide which suits you best.
3. Prepare for ups and downs
Going self-employed often leads to fluctuating income, but planning ahead can make it easier to cope with leaner periods.
“I worry about the rollercoaster of not having enough work, then having too much,” says freelancer copywriter Libby Marks, who knows other freelance writers who are struggling.
DO: Prioritise building up an emergency fund – three-to-six months’ worth of essential outgoings – so that you can meet your financial commitments if you experience a dip in income. Building savings from scratch might be easier while you’re still in employment, but if you’ve already left your job you can still work on making saving a regular habit.
Using a cash-flow forecasting tool can also help you manage the highs and lows. Many freelancers find accounting software invaluable. Some business bank accounts include this as a freebie.
DON’T let debts mount up. If you need to borrow money for your business or to tide you over with personal expenses, a business credit card could help you manage cash flow, and some offer rewards. Just remember to pay down the balance as soon as possible once the money starts rolling in, because interest can build up quickly.
4. Pay towards your pension and other benefits
For many freelancers, the freedom to choose who they work with and when is worth sacrificing employee benefits like sick pay and pension contributions. But just because you’re freelance doesn’t mean you can’t make provisions for yourself.
DO: Prioritise setting up your own pension and pay into it whenever you can. Considering your income may vary month-to-month, your pension contributions might, too. Taking care of your future finances can relieve financial anxiety and create greater security.
Keeping your savings topped up can make it easier to afford some downtime. Income protection insurance (IPI) or critical illness cover could offer added reassurance in case you’re forced to take unplanned time off.
Marks took out IPI as soon as she started freelancing, but found her insurer didn’t cover time off to care for dependents. Fortunately, she also had critical illness cover, for herself and her children, which provided a payout that helped keep her household “ticking over” after her daughter’s cancer diagnosis.
DON’T forget to account for time off. Failing to factor non-working days into your budget could mean a break from work leads you into financial difficulty. Freelancers’ mental health can also come under threat if you’re so stressed about money that you can’t step away.
5. Get ahead with your tax bill
Filing taxes is one of the most stressful times of the year for freelancers, but putting it off will only make life more difficult.
“My main financial stress comes from meeting my tax obligations,” says Marks, who learned the hard way that not saving monthly for her tax bill meant having to find “huge sums when my tax was due”.
DO: Check what you can claim as expenses as this can reduce your tax liability. Move a portion of your profit into a separate account each month where it can earn some interest until it’s time to pay HMRC.
DON’T leave your taxes to the last minute. HMRC requires payments on account towards next year’s bill, in January and July. This can feel hard to begin with, but once up and running should mean you’re not faced with such a big bill in future years.
If you’ve registered for Self Assessment but are unsure whether to do your own or hire an accountant, we’ve broken down what you need to consider.
Image source: Getty Images
About the Author
Dive even deeper
Small Business Grants and Start Up Business Grants in England – Apply now for 2025
by George Harrison
Tipping in the UK: How Small Businesses – and Workers – can Benefit From the New Rules
