Financial strategies for freelancers: Budgeting, taxes, and retirement planning

With the evolution of flexible working, self-employment is seeing a boom. More of us have taken the plunge into making a living out of our passion and skills and being our own boss. But with this new found career freedom comes increased responsibility for our finances. Here are some finance tips for freelancers that can help you succeed.

For all of the perks that come with being a freelancer, there are luxuries you enjoy with regular employment that you might not appreciate until they’re gone. Freelance taxation, for example, is a lot more complicated than PAYE tax that quietly, and automatically, disappears from your pay.

You also miss out on sick pay, annual leave, bank holidays, bonuses, health benefits and of course the comfort of knowing that you always have another day’s work tomorrow. It is possible to earn good daily rates to compensate for the loss of benefits, but with an irregular income, staying on top of your finances is even more important.

Why budget as freelancer?

When it comes to self-employment, your income can be irregular so planning and budgeting is essential. While you might have lots of work in one month, you might be scratching around for it in the next. Balancing your finances to get you through rough and smooth months keeps things ticking over nicely. 

What about when you are freelance and tax obligations come knocking? Doing taxes can be long-winded when you have to organise it yourself, but it doesn’t have to be too complicated or a shock to your finances. With a bit of planning, you can get on top of it. That’s another reason to budget when you’re self-employed.

You may also want to enjoy the benefits of regular employment, like pensions, holiday and sick pay. Freelancers will often be paid more per hour (or day) than an equivalent salaried role. This is to cover both irregular income streams and compensate for benefits not received. Always be sure to get the benefits by organising your finances.

Another great reason to budget and plan your income when you’re self-employed is to help you work towards stress-free living and financial wellbeing. This is where you feel secure and in control of your money   — sounds nice, huh? You can find out more about financial wellbeing here. 

How to: Budgeting for freelancers

Budgeting for freelancers doesn’t have to be a nightmare. In fact, by using some simple tips and tricks, you can get a basic grip on your finances and give yourself a platform to build up. Let’s take a look at some of the things that you can do to take control of your money as a freelancer.

Create budget and track finances

 It’s a lot easier to budget and manage your money when you have a regular monthly income. With the irregular income that can sometimes come with self-employment, tracking your finances helps you when it comes to the end of the financial year when your taxes are due.

Here  are some of the building blocks of your budget, and your financial strategy as a freelancer:

1. Track your income

As we’ve already said, freelancer income can be irregular. So it makes sense to look at several months and find an average to use as a baseline.  Using this figure, you can start to set your financial targets and establish what you can afford for daily spending.

Remember, freelancers may need to deduct tax from their income before using it for budgeting. Paying your tax on time and in full is super important, to avoid fines or penalties. As a simple rule, set aside between 25-30% of your earnings for tax. Perhaps send this money automatically into a tax pot in your bank account so you’re not tempted to spend it.

2. Expenses

Usually, for personal budgets, you can separate your expenses into essential and non-essential categories. Necessary expenses include rent/mortgage, bills and groceries. Non-essential includes luxuries like going out for dinner or using streaming services for example. Using your average monthly income, you can start to set spending limits for these categories. 

There are lots of different budgeting rules you can use to work out spending limits. But we’ll focus on the 50/20/30 method. This divides your post-tax income into two chunks: 50% for your essential expenses and 30% for your non-essential expenses. That leaves you with 20%   towards financial goals like saving and investing.

Look at your expenses and see if they fit into the percentage chunks for essential and non-essential spending. If not, you can use comparison sites to squeeze your bills and groceries, or perhaps make some sacrifices with things like streaming services and takeaways until your expenses fit your budget. 

The great thing about this budget is that it can be flexible to your income, as it will always be a sustainable percentage of what you earn. This is why it’s useful for freelancers with an irregular income. Other budgeting rules use different percentages but often work with a similar principle. 

3. Savings

When you’re self-employed, you can miss out on benefits that employers offer their full-time staff. You might be wondering how to get sick pay and annual leave, or what the best pension is. Using the budgeting rule above, if you’ve managed to fence off 20% of your income, it gives you options.

The first thing you can do is put that 20% slice of your income into a savings pot. You can then use these funds to build an emergency fund, which is normally around 3-6 months of your income. This covers you for unexpected and expensive surprises, or to cover your sick pay and holidays, or even quieter work months if necessary. You can also build longer-term savings to contribute to things like your pension. 

So, whether you’re looking at short or long-term savings goals, you can build a nest egg, and peace of mind, by using your freelancer budget to get smarter with your money. If you have debts, it’s best to pay them off before saving because the interest you pay on your loans will often be a lot higher than the interest you make on your savings.

A great tip when saving is to automate your payments. Direct Debits allow you to manage your money without relying on your memory and willpower. By automating your payments you can make sure to pay yourself first and avoid the temptation to spend on more non-essential things.

4. Investments

If you have paid off your debts and you have a decent emergency fund saved up, you might want to consider ways of making your money work harder for you. In this case, an investment might be right for you. Investing is essentially putting money into something with the expectation of its value growing. 

You could buy shares in companies and industries you expect to see growth, buy a property to realise a greater value in the future, or even invest in antiques, fine wines or art. There is of course an element of risk with all forms of investing, but the returns can be much greater than holding your money in savings.

Investing your money could be an option for hitting longer-term financial goals, like retirement plans. This is because investing often requires a lot of patience. You can see great returns but they are rarely immediate. You’ll often need to leave your investments for at least five years before you see a fruitful return.

Freelance work and taxes

Let's address a common concern for freelancers: how to pay taxes when you’re self-employed. Many freelancers wonder about this because it’s not always clear when you start working for yourself. You might think getting your first client was the hardest part, but now you're asking, “how do I pay taxes without getting fines or penalties?”

Paying taxes as a freelancer can be a bit challenging and sometimes frustrating. However, if you follow our budgeting tips, track your finances, and hold on to your business receipts, it won’t be as difficult as you think.

It’s important to get it right because HMRC’s freelance tax is a legal requirement. You can be fined or face penalties if you don’t comply, or if you miss deadlines.  In the UK, paying taxes as a freelancer usually classifies you as ‘self-employed’ for tax purposes. This means:

• You are required to fill in a Self-Assessment Tax Return every year. You can do this via the government website, and it outlines your income and expenses as a freelancer. This process lets you know how much Income Tax and National Insurance you will have to pay for the year.
• You will need to register for VAT if your income from self-employment is more than £85,000 over 12 months. VAT for freelancers is charged on your services and submitted by filing VAT Returns.
• You are required to pay Class 2 National Insurance if your profits exceed a set amount, and Class 4 if they are below the limit. To check the most up-to-date threshold for the different Classes of National Insurance, check the government website.

This section is designed to offer tax help for freelancers starting out on their journey, to give you an overview of the sorts of things to expect and some advice on how to stay on top of your finances.

Doing taxes as a freelancer: What do I pay?

To get the most recent HMRC freelance rules, like deadlines and contributions, it’s best to check the government website. Freelancers are normally required to pay Income Tax and National Insurance Contributions. How much, and which class of National Insurance you pay depends on how much you earn in profit in the year.

Your profit is the money you make, your income after you have deducted the expenses required to earn it. Not paying tax on your expenses means that you can reduce the amount of your profits that you are required to pay tax on, which therefore reduces your overall tax bill. That’s why it’s a good idea to keep all of those receipts.

The UK tax year is from 6 April in the current year to 5 April in the next year. If it is your first time filling out a Self-Assessment Tax Return, you need to register to do so by 31 October of the following year and fill it in online by 31 January the year after that. Missing these deadlines can result in fines starting from £100.

Self-employed tax: How much do I pay?

As a freelancer with an irregular income, it can be difficult to know how much money to set aside for your tax before you’ve filled in your tax return. But by then, if you haven’t already been putting money aside from your income to cover it,  it can be too late. So, how can you avoid falling into this trap?

The first thing to know is how tax is charged. As a freelancer, you will have a personal allowance - that’s the amount of money you can earn before you have to pay any Income Tax at all - of £12,570 (as of 2024-2025). So, if you earn below this amount in a year you won’t have to pay any Income Tax. 

The easiest way of knowing how much tax to pay as a freelancer is to put between 20-30% of your income into a separate account. This can be a savings pot that you dedicated solely to your tax. Doing this makes it clear what tax and what can be spent on your financial goals. And it also takes away any nasty surprises of trying to find the money if you’ve already spent your tax. Automate the payments so your tax is set aside before you have a chance to spend it on anything else. 

If you earn more than this threshold, you will be required to pay a percentage of your income, depending on how much you earn. Up to £50,270, you will be taxed 20% of what you earn over £12,570. Over £50,270 is 40%, and over £150,000 is 45% (as of 2024-2025). 

Tax deductions

You can reduce the amount of profit you’re required to pay tax on by deducting your business expenses. Keeping receipts of anything you spend that is reasonable business use can help you justify your deductions, so grab them for everything relevant — however small it may seem. It all adds up over a year!

Let’s look at some of the things that can be claimed as business expenses:

• The cost of your broadband (not including personal use)
• Your smartphone bill (not including personal use)
• A portion of your rent or mortgage (dividing up what percentage of your living space is used for work)
• Co-working space rent
• Hardware (like computers, stationary and tools)
• Software (like photo and film editing, and web hosting)
• Business travel
• Training and courses
• Advertising

Tax help for freelancers

Tax takes patience and a bit of hard work but it doesn’t always need to be complicated. Depending on what you do, and how many expenses you have, you might be able to fill out a tax return in an afternoon. But for some, it can be very confusing. In that case, or even if you just want help to make the most of your deductions, you may want to consider getting help from an accountant.