By Jonathan London on 18th June 2015

How freelancing affects your finances

Being a freelancer definitely has its benefits. You can work in your slippers, with a hot fresh coffee and have the radio station of your choosing on in the background. Plus, there’s no-one there to judge you when you switch over to a channel that plays music instead of having news breaks.

But freelancing can mean than you need to adopt a different approach to your finances. Becoming solely responsible for your total monthly income can take time and some careful financial planning – not to mention nerves of steel. Here’s our overview on how freelancing affects your finances, and the impact it can have.

Variable income

Even if you have a steady stream of retainer contracts or a number of lengthy contracts already signed on the dotted line, your income will probably still vary month-on-month. It’s usually recommended to have a savings buffer prepared when you first start freelancing, but it’s worth keeping this up if possible. Savings will help tide you over on any slow months and you can top it up again after the months when you have so much work you want to curl up in a ball and lament why you chose freelancing over the 9-5 day your office job gave you.

When you get paid

Depending on the companies you work with and the projects you work on, your payment terms could differ for each client or project. Instead of the monthly pay cheque you’re used to, your bank balance might increase sporadically over the course of a month depending on when you send out your invoices and when your clients get rounds to paying them. Keep on top of your existing direct debits too, as unexpected payments can catch your bank balance off guard and push you overdrawn. Consider consolidating them into one day, so you know exactly when you need to have enough money in the bank to cover them.

Lack of full-time employee benefits

Unfortunately, being a freelancer means that you miss out on full time employee benefits like company pension schemes, paid holiday, statutory sick pay and maternity/paternity packages. It’s worth budgeting for these, and making sure that you save a proportion of your monthly income to cover the times when you’re ill or want to book that last minute all-inclusive package deal to Mexico.

DIY taxes

Freelancing also means that you need to look after your own accounts and taxes. If filling out your self-assessment tax return every January doesn’t sound very appealing, why not check out our accountancy services and operate through your own company instead? Paying a professional can take the stress out of your tax payments and mean you don’t end up inadvertently paying the wrong amount – or worse, being lumped with an unexpectedly high tax bill.

Getting a mortgage

Nowadays, getting a mortgage isn’t particularly easy. But it’s even harder if you’re self-employed. If you’re thinking of applying, make sure you have at least two years’ worth of accounts and proof of a steady income stream for the future. Be aware though; if your income drastically varies between the two years then they might base their affordability calculations on the lower of the two. Also, the paperwork involved in the process is more time-consuming for freelancers so make sure you have everything ready in advance. For more information on getting a mortgage as a contractor, you can read our guide.

Limited Liability

If you decide to operate as a Limited Company, it has great financial benefits. As a Limited Company you receive limited liability, which is a legal protection that means your personal finances are kept separate to the company’s finances. Therefore, you’re not personally responsible for the debts of the company if your business runs into difficulties; you are responsible for a fixed amount (usually your investment).

After you’ve been freelancing for some time, having your finances in shape will be second nature and you’ll soon forget what it was like to get a paycheck land on your desk every month. Besides, working for yourself far outweighs the hassle of managing your finances; you can outsource your accounts, but you can’t outsource office politics.

Jonathan London Written by Jonathan London

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