Five money lessons I’ve learned since becoming self-employed

Becoming self-employed brings with it a whole new way of managing your money. You aren’t just managing your own finances any more, you’re running a small business and if you’re a sole trader like me, the two become pretty intertwined.

It’s now four years since I started out as a freelance journalist and I can honestly say I now wouldn’t have it any other way. I love the flexibility it provides and to be the master of my own day without any concern about whether I “should” be at my desk, but financially it has been a steep learning curve.

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Here are five things I have learnt so far:

1) Tax, tax, tax

Chatting to fellow freelancers, the first tip I was given was always save your tax, for every invoice, as soon as you get paid. Without an employer to deduct income tax or national insurance (NI), it’s down to you to pay it yourself via self-assessment. Working out how much to put aside isn’t an exact science when you don’t know what your annual income will be. After a bit of trial and error, I’ve settled on 35% of what I earn – that takes into account NI contributions and allows for the personal allowance.

Initially I paid my tax into the savings account linked to my current account, purely for ease. But the combination of rising interest rates and the realisation of just how much was going into that account made me see I was paying the price for that convenience. My tax money is now going into a much higher paying app-based instant access account. I get to keep the interest I earn and it only takes me about 30 seconds more to move the money than it did when I held both accounts with the same bank.

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I’ve also learned that filling in a tax return wasn’t anywhere near as complicated as I feared, so long as you’ve kept records of your earnings and your business expenses (of which mine, as a freelancer who works at her laptop from the kitchen table, are minimal) it’s reasonably straightforward.

The kicker, of course, is the bill. In addition to the tax you owe, you will also have to make a “payment on account”. This is an advance payment on your next year’s bill (usually half of the previous year’s bill), with payments due on 31 January and 31 July – something that can come as a surprise if it’s your first year and you’ve not completed a tax return before.

2) Don’t forget your pension!

According to The Association of Independent Professionals and Self-Employed (IPSE) only 31% of self-employed people pay into a pension – pretty worrying when you consider that 44% of them are aged between 50 and 65.

As a journalist who writes about pensions, in some capacity pretty much every week, I couldn’t be one of those statistics. Relatively early in my freelance career I consolidated my workplace pension into a self-invested personal pension (SIPP) and set up a direct debit making a payment into it each month.

But, in case that sounds a bit smug, I’m not paying in as much as I should – especially as I don’t have an employer making contributions in on my behalf. My direct debit is cautious on the grounds that my income fluctuates and I need to know I can pay it (along with all the bills) each month.

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However, it’s easy to make ad hoc payments into my SIPP, so this year I have been trying to make additional contributions, when I have the money to spare.

It’s not a perfect strategy – but given the amount of time I spend writing about retirement planning, I thankfully get plenty of nudges during my working week.

3) Keep an eye on your turnover

Most freelancers are pretty tuned into their earnings. In the early days, especially, there’s an inevitable compulsion to compare the money you are making now with your earnings while you were employed.

But as I discovered, knowing what you have earned this year isn’t enough. To spare you the tax headache to end all tax headaches, you need a laser focus on your turnover. It was the process of completing my annual tax return that made me realise that I needed to face up to the horror that is VAT - my turnover was perilously close to the threshold for the tax.

Further investigation revealed that HMRC isn’t interested in what you’ve earned over an isolated 12 months, rather it looks at your turnover on rolling 12-months basis. This resulted in a panicky hour or so going through my accounts and the realisation that I needed to register for VAT - immediately.

Thankfully, I only ended up registering six weeks late; I didn’t get a penalty but the bill still needed to be paid.

Now I really understand why the advice is to register for VAT early, before you’re compelled to.

4) Hire an accountant

I don’t find invoicing too much of a chore – in fact I sometimes appreciate an hour or two of admin to give my brain a change. But, for me, the VAT was the headache that made me realise I would benefit from some professional help.

I’m still doing all my invoicing, but I’ve hired an accountant to help me sort out my VAT and get my returns filed in time. No freelancer ever relishes paying for professional services, but VAT is a stress I don’t want to be dealing with, and on the plus side HMRC views it as business expense, so it’s tax deductible and there will be a pay off in my next tax return.

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Although I’ve been happy to do my own tax returns, I am also aware that I might not be fully taking advantage of the reliefs and allowances I’m entitled to (am I claiming the correct portion of my mortgage interest or utility bills, for example?), so I think I will also ask my accountant to take that job off my hands this year.

5) Make hay while the sun shines

I have to say, I prefer having my pay drip-fed into my account over the month, rather than holding until a monthly pay day. You might not get the same pay day “wahoo” with lots of smaller payments, but I have noticed it makes budgeting easier and I go overdrawn less frequently.

But the challenge is that my income varies from one month to the next. Regular clients now mean my income is relatively stable, but some months will always be better than others. At the last check, there was a £9,000 difference between my best and worst months and, as great as it is when you have a bumper month, you can’t count on another one the following month.

So, rather than getting carried away in a good month, I’m trying to be disciplined, syphoning my “surplus” into an easy-access savings account – not my tax one, that would be confusing – in case I need it in a leaner month. And if I don’t, I’ll have a bit more to go into my holiday fund or to top up my pension.