Financial Planning for Freelancers: A Short Guide

Freelancing can offer the ideal work-life balance. It can give you control over your earnings, working hours, and the projects you take on.

But it can also be unpredictable, and leaves you without a safety net if things should go wrong.

21st July 2021

A financial plan can help you set goals, both personally and in your business, and guide you on the path towards achieving them. In this guide, we look at the main financial planning factors you should consider as a freelancer.

Cash Management
The first step in any financial plan is making sure that you have enough cash to deal with emergencies. An unexpected bill or short period out of work can lead to borrowing, or dipping into investments that were earmarked for other purposes. This can easily derail a financial plan.

By keeping a cash reserve, you can handle unexpected events without compromising your financial security.

Your earnings might not be as consistent as a salaried employee. So it is even more important to keep an emergency fund, as well as a cash buffer to see you through any leaner months. We normally recommend at least 6 months’ worth of expenditure, but depending on the peaks and troughs of your business, it might be appropriate to save even more than this.

Income and Tax
As a freelancer, you are responsible for calculating and paying your own tax. Here are some tips to make this as painless as possible:

When you run your own business, you don’t have access to employee benefits such as death in service or company sick pay. The responsibility is on you to arrange these.

These are the main forms of protection that you should consider:

Life Cover
This would pay out a lump sum if you were to die. This could be used to repay your mortgage or to provide for your family. If you run a limited company, a relevant life plan would allow your business to pay the premiums as an allowable expense.

Critical Illness
This pays out a lump sum if you are diagnosed with a serious illness. The money can be used to cover lost earnings or to make any adjustments needed, for example, to your home or vehicle.

Income Protection
This would provide you with a regular income if you were unable to work for an extended period due to illness. If you draw your income in the form of dividends, it’s important to find a policy that takes these into account when assessing your insurable earnings.

Private Medical
If you are ill or injured, waiting for treatment on the NHS could limit your earning potential. You may want to arrange healthcare cover to fast track these procedures and get you back to work as quickly as possible.

When setting the prices for your business, it’s important to remember all these extra costs that wouldn’t apply if you were employed.

Debt Reduction
As a freelancer, you might find it is not as straightforward to arrange a mortgage. Lenders assess affordability in different ways, and you might need to produce proof of your earnings. It can be worth seeking independent mortgage advice.

Your earnings may also be unpredictable and your circumstances could change in the future. It’s important not to over-stretch your budget by borrowing more than you can afford.

Investment Planning
Business owners often neglect this area of financial planning. They might prefer to invest in their own business instead, particularly if it can be built up as an asset to sell in the future.

But we always advise clients to diversify their investments, and it is no different when one of the assets is your own business. It’s worth building up a pot separate from your business to give you some flexibility if your plans change.

Using your ISA allowance to invest in funds is a great start.

Retirement Strategy
Whether or not you plan on selling your business to fund your retirement, you should still consider pension contributions.

If you have a limited company, paying pension contributions from the business can be extremely tax efficient. The contributions are an allowable business expense, and could reduce your Corporation Tax bill. Contributions aren’t limited by earnings, but must be considered reasonable by the Local Inspector of Taxes.

Your contributions are subject to an overall annual allowance of £40,000 per year. If you don’t use up all of your annual allowance in one year, you can carry it forward by up to three tax years. This can be useful if you have a particularly profitable year.

As you don’t pay tax or National Insurance on your pension contributions, this can be a great way of extracting profits from the business to provide for your future.

Estate Planning
Wills and Power of Attorney are important for everyone, but did you know that you could also create these for your business? This means that if you die or become incapacitated, someone you trust will either be able to take over the business or arrange to wind it up.

The person you choose to manage your business might be different from the person you appoint to deal with your personal affairs or medical care.

Your business is an important asset, and even if it’s not possible to sell it, you should have a plan for when you can no longer run it yourself.   

Please don’t hesitate to contact a member of the team to find out more about financial planning for freelancers.

Our News

J Edward Sellars Investments

Request a call with a financial advisor, we're here to help

Here at J Edward Sellars & Partners Ltd. we take your privacy seriously and will only use your personal information to get in contact with you about our services. By filling out this contact form, you give consent to us to contact you.