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Being self-employed is great! The joy of being able to make your own hours, be your own boss and work how you like can make life a lot easier. Whether you are a freelance graphic designer, a hairdresser renting a chair in a salon or an independent tradesman, being self-employed can be a great career move.
Arguably, the only downside is that you now have to manage your own finances. This means taking care of taxes, saving for retirement and keeping on top of your cash flow. Here are some tips to keep your finances on track when self-employed.
Get clear on your income, expenses and tax obligations
The nature of self-employment means that your income will fluctuate. Tracking your income and business expenses allows you to plan for the coming months without any surprises.
Make a spreadsheet detailing all outgoings and the dates the bills are due to ensure you know when money will be leaving your account. You could also keep a separate sheet for your income and when invoices are due to ensure you are paid properly. There are options to keep a consistent cash flow in the leaner months, such as self-employed loans. This helps to keep you afloat when income dips.
Understanding your tax obligations can be daunting. Running a business as a sole trader is different from running a limited company, so your taxes will be too. Take time to understand your obligations to avoid facing penalties.
Budgeting with irregular income and building a financial buffer
Creating a realistic budget when you have irregular income can help a lot in both your personal and business life.
If you have been working for a while, use your average income figures to plan around. Prioritise essential costs like housing, bills and food. Don't forget to set aside your taxes each month – this prevents a huge bill at the end of the financial year.
If possible, build an emergency fund. This account can be used in an unexpectedly quiet month as well as for any unexpected costs.
Staying on top of UK tax changes and Making Tax Digital
HMRC is very clear about the rules you are expected to follow when you are self-employed. Make sure you are aware of the Self-Assessment deadlines and try to submit your returns in advance in case of any filing issues.
Making Tax Digital is being rolled out for self-employment, so you need to be aware of the changes. The most important difference is that digital record-keeping is required. Investigate compatible software or use the services of a bookkeeper to ensure compliance.
Protecting yourself: Pensions, insurance and planning for the future
Many employed people take having a pension scheme for granted. When you are self-employed, you need to organise that yourself. You could set a minimum payment up each month, and commit to adding more if you earn more.
You should also consider getting income protection insurance or critical illness cover. These policies give you a financial buffer should anything go seriously wrong with your health.