Financial advice for the self-employed

There are a lot of attractions to being your own boss but, as any self-employed person will tell you, being the boss of your own money is a must.

The impact of the Covid-19 pandemic means more people are now self-employed or setting up self-employment early in their careers – either by choice or by necessity. Whatever your field of activity, it is crucial to master your freelance finances. Yet many are struggling to find the time. Here are the key points to get you started.

What’s the daily rate ?

The first question for a new freelancer is how much to charge. And the best way to find out is to research what and how others charge for their work. Networking groups for your specialty are especially valuable for this.

However, you also need to figure out what you need to survive and if that is realistic. Start with your personal finances and work your budget. How much do you need to earn each month to cover your costs? At a bare minimum, what would that amount to a “daily rate” – and how does that compare to what others say they can achieve?

Remember you will have to pay tax on freelance income – look for a simple online tax calculator to help you determine the likely amount. The rules vary depending on the geographic location, but some companies withhold basic tax.

You should also plan to build up a savings buffer in cash. If you don’t have a regular income, you are really going to need this safety net for the leaner months.

In addition to emergency cash reserves, the self-employed should also think about pension savings, although few find it easy to put money aside. The basic problem is that pensions tend to be inflexible: once you put the money in, it can be stuck for decades. But you can get tax relief on anything you can save.

Don’t work for free

Unfortunately, some clients interpret “free” a little too literally in freelance. Beware of those who expect you to work for nothing, just to “get the exposure.”

You should always talk about the money before you accept the job. These conversations can be awkward, but they are necessary – and having a good understanding of your daily rhythm will help.

Anne Boden, founder of Starling Bank, recently reinforced this point on the FT’s Money Clinic podcast. She said: “This is a particular problem with women as they tend not to be ready to say, ‘I’m worth X amount per day; I am not prepared to have this conversation with you for free; and I’m not ready for this coffee, so you can just choose my brain ”. So take a sheet of his book and say, “I’m a professional, these are my fees, I’m worth it.” And that’s what I’m going to charge.

This is the easy part – the hard part is actually getting paid, which can be torturous. Some customers will ask you to register as a supplier; others require that invoices be completed in a specific way with codes and reference numbers. My advice is to befriend the accounts of companies you work for a lot.

No free lunch: be upfront about charging others for your time, advises Anne Boden © Charlie Bibby / Financial Times

Keep it separate

One of the biggest challenges for the self-employed is to separate their business income from their personal finances. But it will make it much easier to keep track of cash flow and pursue overdue payments – the bane of any self-employed person’s life, let alone filing annual accounts and tax returns.

Be aware that some banks charge fees for business accounts; digital banks tend to be the cheapest and have the best apps. You don’t have to start your own business to qualify – most banks accept applications from independent traders (those who work for themselves).

For those who combine employment and self-employment, it is usually possible to have a full-time PAYE job and register as self-employed for self-employment income. My system is to set aside a percentage of any independent income I generate and put it in premium bonds. I can earn a tax free prize while waiting to pay my tax bill.

Application or accountant?

Generating invoices and processing receipts, expenses, and tax invoices are worth setting up some sort of administration system. At its core, it could be a spreadsheet, but there are a growing number of apps – free and paid – that will streamline the process.

Nimesh Shah

Nimesh Shah © Nick Strugnell

It’s great when you’re just starting out, but could an accountant deliver something that an app couldn’t? “Apps are great for collecting data, but they can’t guide you through what that data means,” says Nimesh Shah, managing director of accounting firm Blick Rothenberg, which has nurtured many start-ups.

The first thing he examines with start-up clients is the level of cash flow – the lifeblood of any business – and whether they are growing too quickly. “Apps can tell you how much tax you’ll have to pay, but they don’t necessarily tell you about tax breaks,” he says. In fact, accounting fees can be one of your tax deductible items.

Find the right structure

Most freelancers start out as independent traders but over time they may need a more corporate structure.

Some clients will only deal with limited companies or partnerships. Depending on your industry, you may want a business structure that protects you from future legal claims.

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Such a move would require the help of an accountant. This will increase your administration costs, but remember that businesses can often claim more generous tax breaks.

Accountants will ask new business owners questions about the right structure and question their thinking about it, Shah says.

“If you are an entrepreneur who starts a business with the idea of ​​someday selling it. . . getting this advice early on can save you a fortune in legal fees down the road, ”he explains.

The author is the consumer editor of the FT and the presenter of the FT Money Clinic Podcast; Follow Claer on Instagram @ClaerB

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