5 things *not* to do as a new freelancer: finance edition 💸
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The ultimate guide to what not to do when it comes to your finances as a freelancer.
1. Not saving money for your tax bill
This is probably THE biggest (and easiest) mistake to make when you make the switch from PAYE to self-employment. You’re used to your tax, National Insurance and/or student loan coming out of your pay check automatically, and now you have to manually put money away from every invoice so you can pay HMRC when the time comes. It’s a major pain, I know, but once you get into the habit of doing it, it does become second nature!
Saving 20-30% of each invoice into a separate account is a good rule of thumb - this should cover tax and NI, and student loan if you have one. As soon as that money lands in your bank account, make the transfer, and thank me when your tax bill arrives.
It’s also very important to remember that ‘payment on account’ is a thing - we sole traders must make two payments on account every year as an advance payment towards the next year’s tax bill. The first one is added to the tax bill to be paid by 31st January, and the second must be paid by the 31st July. Here’s a handy example from the HMRC website:
Your tax bill for 2022-2023 was £3,000 (due by January 31st 2024). You made two payments of £900 each towards this bill in 2023.
The total tax to pay by midnight on 31 January 2024 is £2,700. This includes:
your ‘balancing payment’ of £1,200 for the 2022 to 2023 tax year (£3,000 minus £1,800)
the first payment on account of £1,500 (half your 2022 to 2023 tax bill) towards your 2023 to 2024 tax bill
You then make a second payment on account of £1,500 on 31 July 2024.
If your tax bill for the 2023 to 2024 tax year is more than £3,000 (the total of your 2 payments on account), you’ll need to make a ‘balancing payment’ by 31 January 2025.
2. Guessing what your day rate or project rate should be
Do. Your. Research. I massively undercharged during my first year of trading - luckily, I got the chance to work with a group of much more experienced freelancers quite early on who became my unofficial mentors and gently but firmly guided me in the right direction, but without their insight, I probably would have carried on criminally underselling myself.
I initially used one of those online calculators to work out my day rate based on what my full-time salary used to be, plus 30% to account for loss of benefits (pension, sick days, annual leave etc) and it came out at £150 per day, before tax and National Insurance had even been deducted! Considering the fact that I had only held junior roles before I went freelance but had built up experience and connections far beyond my junior salary, this method just wasn’t going to work for me.
Remember that your clients aren’t just paying for your time: they’re paying for your experience, the skills and knowledge that you’ve acquired and the confidence and self-assuredness in your craft that sets you apart from everyone else. You are your biggest asset and you deserve to be paid fairly.
3. Quitting your job without any clients or a safety net fund
If you’re thinking about freelancing and you are currently employed, consider putting away some cash before you send the resignation letter that’s been sitting in your email drafts for months. You’ll get your Bridget Jones moment, I promise!
There’s a lot of rhetoric online about ‘taking the leap’ or ‘just going for it’ when it comes to freelancing or starting a business, but it’s not sexy to talk about the practical stuff you need to have in place before self-employment can become a reality. It’s a very, very sensible idea to have at least two months’ worth of living expenses, ideally three to six months if possible, saved whether you’re a full-time employee or not (redundancy or restructuring happens, people), but even more so before you quit your job and go it alone.
If you can start building up a client base and working on freelance projects in the evenings and on weekends while you’re still employed, even better: but check your contract first! I cover this and other topics in more detail in my freelancer Q&A:
4. Not being prepared for your income to fluctuate
It might sound obvious, but it really helps to mentally prepare yourself for the fact that you’re no longer going to have the same amount coming in each month, especially if you plan to work project-by-project rather than on a retainer basis (or possibly a bit of both!). It’s quite the adjustment, and I found that I had to relearn how to budget all over again to make it work.
The safety net fund I mentioned earlier really comes into its own here. If you can save three to six months of expenses ahead of time, you can use that fund to top up your freelance income in the months where you fall short, especially when there’s a protracted period of little or no work coming in. It’s not just for emergencies!
I’m now four years into my freelancing career and work almost exclusively on a month-by-month retainer basis with my clients, aside from a few stand-alone projects that I take on throughout the year, so my monthly income is fairly predictable for the most part - but things can and do change all the time, so finances are very much on my radar and I’m always planning ahead.
5. Feeling pressured to have ‘financial goals’
Lots of ‘freelance experts’ or mentors will tell you (usually in their free webinar where they will try to up-sell you ALL kinds of other services) that you need to have financial goals when you’re self-employed - and hey, if that speaks to you, please go ahead! You do you. HOWEVER, it’s not an essential part of being a sole trader or being quote unquote ‘successful’ as a freelancer.
It’s OK to just see how it goes and not pin any specific numbers or goals on your fledgling freelance career. What you do need to do when you first start out is figure out a financial bottom line, so that you know the minimum that you need to earn in order to keeping living the life that you want to live.
I’ve never had financial or career goals, always operating on a see-what-happens kind of mentality, but that works for me as someone who feels quite stressed by the idea of trying to hit milestones. If it’s less stressful and more motivating for you to have goals in mind, financial or otherwise, do what makes you feel most excited about your freelance career! What I object to is the idea that your finances or the clients that you work with are the measure of success, when actually it’s how you feel that really matters. Nobody can possibly know your metric of happiness, except for you - so if someone else’s advice just isn’t matching up to how you want to do things, don’t listen to it!
I really hope that this was helpful! If you have questions or anything you would add to this list, pop them in the comment section below 👇
Lauren x