1. A personal spending diary
Write down everything you spend for one month. Everything. Not just big stuff but all the little things - like that £2.50 hot chocolate you bought at the station. You’ll become aware of what you’re spending your money on. Chances are you spend way more than you thought on these ‘little’ things. A few quid on hot chocolate might not seem like much but it adds up.
Based on your personal spending diary, ask yourself two questions:
- How much do you need to earn each month in order to survive?
- And how much would you like to earn each month?
The second figure gives you a target to aim for. But keep in mind that there will be some months when you don’t earn much - or anything at all. You still need enough money to cover figure one.
2. An understanding of your freelance status
There are only two ways that you can earn money. Either you’re employed or you’re self-employed. And the word ‘freelance’ can apply to both. If you’re employed, you’re enrolled on PAYE (Pay as You Earn), which means your employer pays your income tax on your behalf. Some people who call themselves ‘freelance’ are employed on a series of short-term contracts for different companies.
If you’re self-employed, you’re responsible for paying your own tax. You have many different clients and sources of income. You set your own hours and rates and you choose when to work. You provide your own kit, tools and your own workbase (this could be a rented studio or it could be your home). People who are self-employed aren’t supervised, directed or highly controlled.
Most self-employed creative freelancers who are starting out are classified as sole traders. For more information on this and on other types of business, check out the ‘business and self-employed’ and ‘money and tax’ sections of gov.uk.
3. Agreements in writing
Before you start work on any job, you need to know three things: the price for the job, what the job is and the hours or deadline/completion date.
Most clients provide no paperwork so take the initiative and put together a confirmation letter containing this information for them to sign and return. All you need to make an agreement legally binding, though, is acknowledgement from the client so you could just attach your confirmation letter or simply pop the information in an email and put, ‘If you’re happy with this, just reply yes’. If you agree the job over email - or Facebook Messenger or WhatsApp - take a screenshot so you have a record of it.
4. A system for chasing payments
Always include a note at the bottom of your invoice with your terms of payment. State when the invoice must be paid by: ‘This amount is payable in full 30 days from the date of issue of this invoice’. And what will happen if it isn’t paid by then: ‘Please note: [Your business name] understands and will exercise its statutory right to claim interest and compensation for debt recovery costs under the late payment legislation if we are not paid according to agreed credit terms. For more information on late payment legislation please see: www.payontime.co.uk’
Come day 31, if you haven’t been paid, call the accounts department of the company. Be polite. Say something like, ‘I’ve noticed a payment outstanding. Have you received the invoice or did I make a mistake on the invoice which means it hasn’t been paid?’ Once they’ve found the invoice, ask when you should expect to receive the money. Write down the name of the person you spoke to and what they said.
If a week later you’ve still not been paid, call again, ‘Just to double check’. Still no sign of the money on day 55? This time when you call, say, ‘I’m afraid I’m going to have to start charging you interest now.’ Send them a new invoice for the interest and the compensation - calculated on www.payontime.co.uk. This should do the trick.
5. An efficient filing system
The tax year runs from 6 April to 5 April. The deadline for filing your tax return is the following 31 January. Unsurprisingly lots of people leave their tax returns to the last minute and do it in January. You can save yourself the stress and do it quickly and painlessly as soon as the tax year ends if you’ve kept your records organised throughout the year.
Use separate filing systems for your employed and self-employed work. As a PAYE employee, you need to hang on to your payslips, your P60, P45, bank statements and any contracts and other agreements you have with your employer/s. For your self-employed work, you’ll need receipts for tax-deductible business-related expenses, invoices, bank statements, contracts or agreements and an income/expense account spreadsheet. Keep this documentation for six years - that’s the time during which you could be investigated or audited by the tax office.
Set up an income/expense account spreadsheet and update it every week for 10 minutes. You can download a free template spreadsheet from David’s website. Transport, broadband, stationery, heating and lighting at your workbase are all tax-deductible expenses.
For items - such as your mobile - that have both business and personal use, put down a percentage based on how much you use it for business. Ask an accountant or HMRC if you’re not sure how to figure this out.
6. A grasp of how tax works
The amount you can earn before you’re charged any tax is called your personal allowance. Currently this is £11,000 - although rates change each year. Even if you don’t earn enough to pay tax, as a sole trader you’re still legally required to keep records and to file a tax return. Anything above that £11,000 is charged at the standard rate of tax - 20% - until you hit £43,000. Then you pay 40% tax on everything you earn above that and 45% for everything you earn over £150,000. Every time you get paid for a self-employed job, you should put aside at least 20% for tax.
You also need to pay another tax called National Insurance. If you’re on PAYE your employer pays this for you. If you’re self-employed, you pay it when you file your tax return.
And remember: knowing when to ask for help is a sign of strength. If you get stuck, contact HMRC.
Words by Rachel Segal Hamilton
