7 Finance questions new freelancers ask

Jun 14

If you’re new to freelancing, chances are you’ve got tons of queries about tax and finances. If we’re being honest, it tends to be the area that particularly worries new freelancers.

To help settle a few of those nerves, here are seven of the finance questions I get asked the most – and the answers I give.

1) Do I need to pay tax on my freelance work?

Yes! When you’re self-employed, you’re responsible for paying your own tax. The only real exception is if you’re just doing a small amount of work and fall beneath the threshold for paying income tax and National Insurance. Even then, you still have to register with HMRC as self-employed and complete a self-assessment tax return each year unless you earn less than £1,000. This might sound scary but it’s actually pretty straightforward as long as you keep a record of your business income and costs.

The really, really, really important thing (yup, it’s super important!!) is to understand that when a client pays an invoice, this is income to your business and not your wages to spend as you like. The big difference from a tax perspective is that, when you receive wages as an employee, your employer deducts tax first, so the money you receive is all yours. However, when you’re a self-employed freelancer, the payments you get from clients have NOT had tax deducted. This means that a chunk of the money you get in belongs to HMRC – and they expect you to hand it over at the end of the year.

A good way to ensure you don’t fall foul of the tax man (or woman), is to deduct ‘tax money’ each time a client pays an invoice and put it into a completely separate pot that you don’t touch. That way it’s ready and waiting when you need to pay your tax bill. If you’re a basic tax rate payer, I suggest setting aside around a third of what you bring as this should give you enough to pay both your income tax and National Insurance. And if you have any left in your tax pot after paying your dues, you can look on it as a lovely end of year bonus.

2) How do I register as self-employed?

If you’re likely to earn more than £1,000 in a year as a freelancer, you need to tell HMRC that you’re self-employed. The simplest way to do this is to set up a sole trader. This simply means that you run your own business as an individual (ie it’s just you) and that you’re self-employed.

You can register as self-employed online via the government’s website. You will need to provide some basic details about yourself, including your name, address and National Insurance number. You also will need to provide your business name, which is the name that you’ll use on official documents, such as invoices. However, don’t panic about workshopping random inspirational terms – this can be as simple as your own name.

Once you’re registered as a self-employed freelancer, you need to keep a record of your business sales and expenses, complete a self-assessment tax return each year and pay any tax and National Insurance due.

3) What financial records do I need to keep for my freelance work?

As a self-employed freelancer, you need to keep a record of both the invoices you send out (including when they’re paid) and of anything that you buy for the business – whether this is a domain name for your website or paper for the printer. One big bonus of registering as self-employed is that you can set off most business expenses against any tax you might need to pay (which, in practical terms, means you can end up with a lower tax bill). If you’re unsure what you can include, HMRC has a useful guide laying out exactly what you can and can’t claim as a legitimate expense.

Although it’s super important that you keep a record of your invoices and payments, it’s totally up to you how you want to do it. Some people throw all their receipts and invoices into a box and then ask an accountant to sort them out at the end of the year. Others prefer to take a photo of each invoice and receipt which they upload onto a finance app as they go along or even invest in full-scale accounting software.

Personally, I use a simple spreadsheet to keep track of my invoices and expenditure as I go along. I then back this up with a copy of the document, with a separate folder for each tax year. It only takes a few minutes to do at the time but makes my tax return so much easier as I have all the information I need to hand. Plus, having a real-time record means I can see the money coming in (and going out), which is always a good motivator!

4) Do I need a separate bank account for my freelance work?

It’s not absolutely essential to have a separate bank account for your freelance work. However, it does make managing your finances and tax return simpler if you keep your freelance banking separate from your personal banking so, personally, I’d recommend it.

This doesn’t necessarily mean you have to open an official business account, with costly monthly fees. If you’ve only got a small number of transactions going through your account each month, you can usually get away with using a free personal account – and you can always switch to a business account if you bank asks for it once all those contracts start rolling in.

If you’ve got an old bank account that you rarely use (and it’s amazing how many people do!) you can recycle that to become your freelance business account. If you need to set up a new account, it’s worth checking out digital banks, such as Monzo and Starling, as they’re usually super simple to set up and have fewer fees attached.

5) Can I freelance at the same time as being employed?

Yes! It’s definitely possible to freelance at the same time as being employed – and many people do. In fact, this can be a brilliant way to test out the freelance route while keeping the safety net of a steady income from your current job. Do take time to check your employment contract first though, as some employers state that you can’t take on a second job while working for them, particularly if your freelance work could be seen as competition.

If you are doing a blend of both employed and self-employed work, you’ll have to provide separate details of the income you’ve got from each on your tax return. To save getting into a tax tangle, set up the finances for your freelance work in exactly the same way as you would if you were freelancing full time. Also, keep the income from your freelancing (which you’ll need to pay tax on) separate from your wages (where tax will already have been deducted). You’ll find your tax return far simpler if you know which bit of money came in under which category!

6) Should I buy a new phone for my freelance work?

Whether or not you have a dedicated phone for your freelance work is really up to you. There’s no official requirement to use a different phone for your work and personal life but you might find it helps to keep the two parts of your life separate – particularly if you’re planning to advertise your phone number or you want to switch off from work when you’re having family time. However, if you only use your phone occasionally for your freelance work, it might not be worth the hassle or cost of having two phones.

One midway option is to look for a phone that lets you have more than one number. There are several smartphones on the market now that have slots for two SIM cards, so you could have one for your freelance work and one for personal use without having to carry two physical phones around with you.

From a tax point of view, it’s simpler to have separate work and personal phones as you know exactly what is and is not business use. However, it’s also perfectly acceptable to use a single phone for both business and personal use – work out the proportion that is for business use and you can then include that on your tax return.

7) Do I need insurance if I’m a freelancer?

You must take out employer’s liability insurance if you employ someone to work for you, even if it’s just one person for a short period of time. This covers any claims an employee might make for injuries or illness sustained at work.

Other than employer’s liability insurance, it’s largely up to you what insurance you take out – which is likely to depend partly on the type of work you do and how you deliver it, partly on whether any clients you work with stipulate you must have insurance (which is reasonably common in some industries) and partly on how much risk you’re willing to take on.

The three most common types of insurance that freelancers have are public liability insurance, which protects you if someone has an accident in a space you’re responsible for, office / property insurance, which covers loss or damage to your office or property and professional liability insurance, which protects you against a client claiming you didn’t do the job properly. On top of those however, there are a whole range of other types of insurance that you might consider – anything from insurance for cyber attacks or business interruption through to personal life insurance.

The simplest way to get insurance is usually through an insurance broker, who can pull together a package of the different policies you want. There are loads of insurance brokers out there – including a few, such as PolicyBee who specialise in providing insurance for small businesses and freelancers.