The Financial Side of Working Freelance

February 22 2016, 0 Comments

Being a freelancer, regardless of the sector, is a challenging task. With the burden of it all being on your shoulders, it is up to you to manage every element of your work in order to develop your career. 

Every penny counts when working for yourself and therefore, it is extremely crucial that every freelancer knows the in’s and out’s of their set up. Knowing how to operate in the most organised and cost effective manner when self-employed can pay dividends in the long run.

Unless you’re a freelance accountant, you will most likely not know a lot when it comes to managing the financial side of things. You could be the best writer in the world but if you neglect your finances, your independent career will be short lived and there can even be severe consequences for those who mismanage it.

Typically, financial matters are the last thing anyone wants to deal with after a long day of work. As stressful as it all may seem, it isn’t actually as time-consuming or daunting as you may expect. A little planning can go a long way so let us take you through how to get the most out of your finances.

Keeping Your Accounts

Understanding information about the financial health of your set up is vital. There are three main areas that you need to know.

The Balance Sheet

This is a statement of the assets, liabilities and equity of your organisation. It details the balance of income and expenditure of your work.

  • Assets = This includes cash, fixtures, accounts receivable (invoices sent out that haven’t yet been paid), buildings, equipment, security deposits and other intangible items where relevant.
  • Liabilities = The accounts you’re payable for. This could be the money you’ve been invoiced for or lines of credit issued by banks.
  • Equity = This relates to any money that has been invested in your business plus any profits you make.

By keeping track of your balance sheet you will be able to determine how healthy your business is doing, you can use accounting software to organise your records more easily.

The Profit and Loss Statement

A profit and loss statement (P&L) is a financial statement that summarises the revenues, costs and expenses. By keeping a detailed record of this, it provides clear information about a company's ability (or lack of) to generate profit by increasing revenue, reducing costs or both. 

The Cash Flow

This regards the net amount of cash and cash-equivalents moving in and out of your account. Cash comes in from assigned projects, your services, loan proceeds and investments. Whereas cash goes out for operating and direct expenses.

To Become a Limited Company

 The easiest way to get going as a freelancer is to register as a self-employed sole trader. There is less paperwork it means that you and your business are effectively the same thing. However, once you build and your income rises, the limited company option could be of interest and a great benefit for you.

Even though this may be more complex to set up, the advantage of running your business as a limited company is that you are likely to pay less personal tax than a sole trader. Company profits are subject to Corporation Tax and small businesses are taxed at the 'small profits rate' which is currently set at 20%.

If you are the director and shareholder of a limited company, you may choose to take a small salary and take most of your income in the form of dividends. By doing this you can minimise the amount of National Insurance Contributions you have to pay because dividends are taxed separately, and are not subject to National Insurance.


Keeping track of your invoices is sometimes a daunting task for freelancers. By carefully and wisely managing your invoicing, you will keep your business running smoothly without frustrated clients or financial issues. Listed below is a checklist to follow so you’ll be operating in the right way: 

  • Use good invoicing software to ease your process.
  • Keep your invoices simple by outlining any services and charges.
  • Create a cost effective fee for your services (in line with competitors and not undervalued).
  • Get confirmation of the receipt.
  • Include your contact details.
  • Number your invoices.
  • Don’t forget the VAT number.
  • Keep an organised log of all invoices.
  • Set out your policies regarding payments from clients (includes: payment methods, fees, how many days you will wait for payment, penalties for missed payments and if the client will receive payment before or after final work submission).


As a freelancer, it’s crucial to get your head around the tax facts. If you’re clued up on this area, you can spare yourself from any penalties and you’ll have the awareness to make forward thinking business decisions. 

As described above in the ‘To Become a Limited Company’ section, your chosen legal structure will determine what tax you pay. Here are the two structures further explained to give you a better idea:

Limited Company

  • Corporation Tax on your taxable profits (20% up to £300,000, after which the rate you’ll face paying rises).
  • Income Tax and NICs on your income via PAYE.
  • Tax on dividends.
  • VAT (if your business is VAT Registered).

Freelancing as a limited company can work out better financially but there are added responsibilities that come with this route so it’s worth weighing up what’s best for your situation at your particular stage.

Sole Trader

  • Income Tax on any business profits over your personal.
  • Class 4 NICs on profits over £7,755 at 9% up to £41,450, and then 2% after this.
  • Class 2 National Insurance contributions (NICs) at £2.70 per week (unless you earn less than £5,725 per year).

You will have to pay income tax and class 4 National Insurance contributions when carrying out your self assessment. Also, there are several simple ways that you can pay your class 2 National Insurance.