Accounting Guide for Freelancers

May 1, 2024

Transitioning to freelance jobs offers flexibility and autonomy but can be challenging when it comes to financial management. As you start your journey, you will often have to manage invoices, expenses, taxes, and cash flow, all by yourself. 

This article aims to shed light on how cloud accounting can be a game-changer for freelancers, simplifying financial management and allowing you to focus more on your craft and less on the numbers. 

Why is accounting important for freelancers? 

Accounting is important for freelancers to avoid fines and penalties. Proper accounting ensures correct income reporting, maximises deductions, and supports timely tax payments, safeguarding against legal and financial challenges. It also drives awareness, efficiency, and growth for freelancers. 

What do freelancers need to do? 

Maintain good financial records 

With freelancing, income can fluctuate, and expenses can vary widely. Having good financial records not only helps with the process of managing finances on a day-to-day basis but is also important when the end of the financial year approaches.  

Good financial records provide a clear overview of income, expenses, and potential tax deductions, making the task of compiling end-of-year accounts easier and with less chance for errors. 

What finances should be tracked as a freelancer? 

As a freelancer, you should be tracking the following: 

Income 

Income is the foundation of financial health, representing the money received from employment, investments, or other sources. Tracking income is crucial for budgeting and planning, as it sets the limits for spending and targets for saving. 

Expenses 

This category can be divided into fixed expenses, such as rent or mortgage payments, and variable expenses, like dining out or entertainment. Understanding and managing expenses is vital for maintaining financial stability and achieving savings goals. 

Savings 

Savings represent the portion of income set aside for future use, not spent on immediate needs, or wants. This category is essential for financial security, ideal for emergency funds, retirement savings, and other long-term financial goals. 

Investments 

Investments involve allocating money in the expectation of some benefit in the future. This can include stocks, bonds, real estate, or other assets. Tracking investments is important for understanding overall financial growth. 

Business expenses 

As a freelancer, you should pay attention to business expenses that can potentially be tax-deductible. These deductions can significantly reduce your taxable income, lowering your overall tax bill.  

Keeping detailed records of these expenses throughout the year is crucial, as they can add up to substantial savings when it’s time to file your taxes. 

Here are common business expenses that freelancers often find to be tax-deductible: 

  • Insurance fees: Professional liability insurance or health insurance if you’re self-employed. 
  • Business tools and costs: Subscriptions to software, purchase of domain names, and web hosting fees. 
  • Travel expenses: Costs associated with business travel, such as flights, car rentals, lodging, and meals. 
  • Equipment: Purchases necessary for your business, such as computers, cameras, or other technology. 

It might be a good idea to hire an accountant as tax laws are complex and can easily change. A professional accountant can help you figure out exactly what can be a tax-deductible expense for your specific situation. They can also keep you updated on any changes in tax legislation that might affect your business, ensuring you’re always maximising your potential deductions. 

Income and outgoings 

Accurately declaring your income to HMRC is a way of avoiding potential penalties, this is why, knowing exactly how much money you have coming in and how much you spend on tools, materials, or any other expenses is essential. With this clarity, you can decide where to cut costs, when to invest in growth, and how to set realistic pricing for your services or products. 

Paying tax as a freelancer 

What tax do I pay as a freelancer? 

Freelancers, like any other professionals earning an income, are required to pay income tax as well as National Insurance contributions, depending on their earnings and the structure of their work. 

Income tax is levied on the profits that freelancers make after deducting allowable expenses, which reduces the taxable income and, consequently, the amount of tax owed. National Insurance, on the other hand, is a contribution to the UK’s social security system, granting freelancers access to certain benefits like the state pension. The thresholds and rates for both income tax and National Insurance can vary each tax year. 

How much tax do I pay as a freelancer? 

One of the key benefits of the freelancer status is the personal allowance, which for the 2024-2025 tax year is set at £12,570.  

This means that freelancers operating as sole traders can earn up to this amount before they are required to pay any income tax. Beyond this threshold, the same tax brackets that apply to other taxpayers apply to freelancers. 

Below is a breakdown of the tax brackets for the 2024-2025 tax year in the UK: 

Taxable Income (£) Tax Rate 
Up to 12,570 0% 
12,571 to 50,270 20% 
50,271 to 150,000 40% 
Over 150,000 45% 

What if I have other incomes? 

Unlike traditional employment, where taxes are often deducted by the employer, freelancers are responsible for their tax obligations. This includes not only the income earned directly from freelance activities but also any other sources of income you might have.  

All earnings, including savings interest, investment dividends, and part-time job income, must be reported. Blending various income streams on a single tax return means that your total taxable income could push you into a higher tax bracket, affecting the overall tax rate applied to your earnings. Consequently, the tax liability associated with your freelance income could be higher than anticipated, reducing the net profit of your freelance endeavours. 

It’s important to plan your finances with this in mind. Effective tax planning strategies, such as making the most of allowable deductions and credits, can help mitigate the impact on your freelance profitability. 

Checklist for Freelancers 

Key Financial Management Actions 

  • Maintain comprehensive records of income, expenses, savings, and investments. 
  • Track fluctuating income and variable expenses accurately. 
  • Pay attention to business expenses that could be tax-deductible (e.g., insurance fees, business tools, travel expenses, equipment). 

Tax Obligations and Planning 

  • Be aware of income tax and National Insurance contributions. 
  • Understand tax brackets and personal allowance for the current tax year. 
  • Account for all sources of income to avoid unexpected tax liabilities. 
  • Save 20-30% of your income for taxes and consider setting up a separate savings account for this purpose. 

Optimising Your Freelance Finances 

  • Take advantage of tax deductibles to reduce taxable income. 
  • Hire an accountant. 
  • Set financial goals and budget, accordingly, aligning with your freelance business strategy. 
  • Build an emergency fund covering 3-6 months of expenses. 
  • Regularly review and adjust your rates based on experience and market demand. 
  • Invest in professional development for long-term success. 
  • Utilise financial management tools for efficiency and accuracy. 
  • Plan for retirement with appropriate self-employed plans and contributions. 

Our tips for Freelancers 

Here are some of our best tips for freelancers: 

  1. Set Aside Money for Taxes: Save 20-30% of your income for taxes since they are not automatically deducted. Consider setting up a separate savings account for tax money to prevent accidental spending. 
  1. Take Advantage of Tax Deductibles: Learn about deductible business expenses like home office costs, equipment, travel expenses, etc., to reduce taxable income. 
  1. Hire an Accountant: Accounting services for freelancers can save you money and time by managing your taxes, maximising tax deductions, and ensuring compliance with tax laws and deadlines. 
  1. Keep Meticulous Records of Invoices: Whether paid or unpaid, for financial planning, analysis, tax preparation, and tracking outstanding payments. 
  1. Set Financial Goals and Budget Accordingly: Align these with income, expenses, and savings, to guide financial decisions for your freelance business. 
  1. Build an Emergency Fund: Covering 3-6 months of expenses can offer financial security and peace of mind for freelancers dealing with income fluctuations. 
  1. Regularly Review Your Rates: Consider adjusting rates as you gain experience and skills to align with your value and market demand. 
  1. Invest in Your Professional Development: Courses, certifications, and conferences to boost skills for long-term success in your freelance business. 
  1. Use Financial Management Tools: This will save you time, reduce errors, track expenses, send invoices, and manage finances efficiently. 
  1. Plan for Retirement: Consider setting up a self-employed retirement plan like an IRA or Solo 401(k) and make regular contributions. 

Hire an expert 

Hiring an expert can take away all the stress and ensure that your finances are taken care of properly. Always make sure you’re hiring the right accountant for your specific needs. 

A cloud accountant manages your accounting needs remotely and provides real-time updates on your financial situation. This is especially helpful for small businesses or individuals who may not have the resources for an in-house accountant. 

Why choose CloudAccountant.co.uk 

Choosing an accountant for freelancers with knowledge of the industry gives you peace of mind and allows you to spend your time focusing on growing your business. 

Our friendly team have years of experience working with freelancers like yourselves. You’ll benefit from our specialist technical expertise and receive support relevant to your sector, such as legislative changes and reporting requirements. 

Our award-winning cloud accounting software will give you the tools to cut down on admin time, monitor cash flow, and manage your business from anywhere. 

If you’re considering switching accountants, we make the process simple. Our dedicated team will guide you through the process and ensure a seamless transition. 

Get in touch! 

Need more information on accounting for freelancers? If you’d like some free, impartial advice on how we can proactively support your business, you can contact us by emailing info@cloudaccountant.co.uk, calling us on 01625 546232, or simply fill in the enquiry form below.