If you’re thinking of going freelance, there are urgent financial plans you need to make first, says MoneyMagpie Editor and financial expert Vicky Parry
Going freelance can be a wonderful career move – but it comes with a lot of financial risk. It’s important to make sure you have a solid financial plan before you go full-time freelance if you can. And if you’re going freelance to create a job because you don’t have one, there are things you can do to find funding and support to get started, too.
Be realistic about your first year income
Going it alone is very exciting, but that means it can be easy to get carried away by how much cash you think you could make in your first year. This is particularly true if you’re following in the footsteps of other freelancers you know, as you’ve seen their success.
However, the first year can be full of ups and downs as you find your way. It’s important to make a plan that looks forward at least three years, to scale up your freelance business in a realistic way. This will help you avoid burnout, but also avoid early mistakes if you’re rushing to make loads of money fast.
Join freelance communities
Freelance communities can help prevent loneliness and increase your business networking opportunities. There are independent communities, like the Creative Boom Studio, run by Katy Cowan for creatives of all types, or those run by industry bodies to support their members.
Word of mouth communities also pop up, like The Messy Collective, which started as a small group and continues to grow organically into a community for women, non-binary and trans writers. Freelance community groups are incredibly valuable to learn more of the unwritten rules about industry etiquette and processes that people can’t always find simply researching on the internet. This will set you in good stead before you fully launch your business, as you learn the ins and outs of how to freelance in your specific industry and build a community of likeminded people.
Have a six-month savings reserve
Before you think about going freelance, make sure you have six months of living expenses saved in the bank. In an ideal world, you won’t need to dip into this fund. However, most freelancers spend a few months finding their first clients and then chasing payment, so you need to make sure you’re financially secure before you take the leap.
This is, of course, a privileged position – if you want to go freelance to create your own job because you don’t currently work, six months’ expenses might be a bit too much. However, you still should save as much as possible before you launch your business, to cover unexpected income delays.
Set up a business bank account
Before you start marketing your freelance business, it’s important to make sure you’ve got your finances separated from your personal money. While sole traders don’t legally need a separate bank account, it can be very tricky to keep track of what is business and what is personal income and expenses if everything goes into the same account.
A basic current account is all you need when starting out. Put your startup funds into it to make sure you start paying for your business marketing and expenses immediately from that account, to make it easy to track.
Prepare for making tax digital
While we’re talking about keeping track of your finances, it’s important to be aware that tax reporting is changing for freelancers in the near future. By 2028, all freelancers earning over £20,000 a year will need to report their taxes quarterly to HMRC through approved third-party software under Making Tax Digital, instead of an annual Self Assessment.
While this might feel like a hassle, it should take the sting out of the Payments on Account system (where freelancers have to pay their tax bill AND 50% of the following year’s bill all in one go in January). It also keeps more real-time information, so you can report accurately and know you’re never more than three months out on your tax reporting, to avoid any unexpected bills from recalculations.
Many business bank accounts now include this software, such as the Natwest business account with FreeAgent. Shop around to find one that suits you.
Decide on your business structure
Decide whether you want to be a sole trader or limited company. Sole traders have fewer obligations, such as not needing to pay employer National Insurance or pension contributions. However, if you earn above the VAT limit (currently £85,000), or expect to do so, it’s worth considering a limited company.
Sole traders are also personally responsible for their business finances. So, if a client is unhappy and wants to claim a refund or take you to court for some reason, you’re personally liable for costs. A limited company gives you some additional protection, separating your personal and business finances.
Limited companies cost a little to set up, and require some regular paperwork such as VAT returns. However, they can be a tax-efficient way to pay yourself as you can take both a salary and lower-taxed dividends. Some industries will also require you to be a limited company before they’ll work with you, too. When you know which you want to do, register your sole trader business or limited company with HMRC.
Look for grants and financial support
There isn’t much in the way of financial support for startups and freelancers right now – but there is some. The first place to turn is Universal Credit if you’ve lost your job and want to go freelance. There is some support in place, such as removal of the Minimum Income Floor for the first year, if you are starting a new business.
Check Turn2Us grant finder too. Most charitable grants won’t cover business expenses, but they might help with living costs which can help take the financial pressure off your first few months’ freelancing. Be very careful when considering taking startup loans. They can be expensive, and if you don’t have a guaranteed way to repay the loan, it could leave you in significant financial distress.
Research your rates
While it’s tempting to set your rates low to entice new clients, this can be damaging for two reasons. First, it tells everyone you’re a novice and that you don’t value your own work – so why should they? Second, it brings the rates down around you for other freelancers trying to compete, and it becomes a race to the bottom, so future earning becomes even harder.
Research your rates to find a reasonable starting point. Many industry bodies and organisations have average rates or annual surveys about rates, to give you a starting point. Make sure you keep your rates realistic, and that you include wording on your invoice template that confirms you will charge interest on late payment. This is something many freelancers are scared to do, but it is a legal right and can help ensure timely payment.
Set aside 40% of every invoice
This is possibly one of the most painful parts about being a freelancer. You’ll see a lovely chunk of cash arrive in your account – and then need to set a lot aside that can’t be touched.
You need to make sure you set aside 40% of every invoice, no matter how small the payment. This helps you budget for taxes, National Insurance, and provides a business buffer to pay yourself the equivalent of sick pay if you need to take time off for illness. Try also to put a small percentage into a pension – even £10 on each paid invoice makes a difference over time.
Consider part-time work
Freelancing is a big change from most jobs. Making the transition can be exciting, but there are some downsides. It can make things easier if you decide to transition to freelancing by having a part-time job, too. It’s not just about the money, though having a regular income can help offset the leaner months on the freelance side. It can be about community, routine, and keeping your skills sharp.
Many people find going freelance means suddenly working alone all the time, and this can be lonely. A part-time job helps you stay connected with others, while keeping your business skills up to date. It can also help open doors to finding new clients for your freelance work, as you never know who knows someone that needs your skillset!
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