How to budget if you are self-employed

What's it all about?

This article's designed to help you:

• Take better control over your finances when you're self-employed.
• Understand the tax and National Insurance Contributions you have to pay.
• Learn some basic tricks for making and sticking to a budget on a self-employed income.

Running your own business can be an incredibly satisfying feeling. You're your won boss and have real control over how you work. However, you might stand to lose more than your job if the sky falls down on you. You may also find it a lot harder to plan out your finances in advance. It might be tricky to make sure all your bill dates and payment deadlines line up with when your earnings come in. None of these problems means you can’t make (and just as importantly, stick to) a budget, however. They just mean you’ll have to keep some extra things in mind when you’re making plans for your money.

There's no crystal ball, but...

Building a budget is about making predictions. Just like an employed person with a regular income, you need to understand where your cash is coming from and how reliable it is. For the self-employed, one of the simplest ways is to base your average expected income on what you earned in previous months. You won’t be able to predict every little bump in the road or unexpected bonus this way, but the longer you keep it up, the more accurate your predictions should tend to be.

Sort your costs out

While you might not be able to predict or control every penny you’ll have coming in from month to month, there’s a lot you can do to keep your costs in line. When you make a budget, you’re trying to account for where every penny you’re earning goes – whether it’s spent, saved or given away. That means it’s every bit as important to track your spending as your income.

Naturally enough, there will be some essential costs you’ve got no way of bringing down. Others, however, might be a bit more flexible. Just to pick one of the more common things self-employed people overspend on, take a look at your broadband package. It’s easy to assume you need a top-tier superfast service, but if all your business needs is email and maybe decent video conferencing, you might be paying too much to get online. Even if you don’t want to slim down your service, you might still find a better deal on a similar package if you’re prepared to scout around a bit.

Basic beginner budgets

So, armed with a clear picture of what you’re spending each month to keep the lights on and a good estimate of your expected income, it’s time to turn that information into an actual budget. The good news is that you’ve already done most of the hard work!

Having regular bills and irregular income needn’t stand in your way too much here. You’re already used to working with averages, so you’ve probably got a decent idea of your annual income. You’ve checked through your regular bills, so you know what your unavoidable yearly “overheads” like electricity and internet access are costing you. Working out what percentage of your total income is being taken up by these essential expenses will tell you what you need to set aside for them each payday.

So that’s the job done, right? Well, not exactly. Bills have a nasty habit of sneaking – or rocketing – up over time, so each year you’ll need to readjust your calculations a bit. The whole point of budgeting is to keep your cash flow healthy over the long term, so working from up-to-date figures is a must. If there’s an unavoidable price hike on the horizon, make sure you’re putting aside enough money now to cope with it later.

Budgeting for beginners

Self-Assessment: taking a good look at your business

The yearly Self Assessment tax returns you have to file when you’re self-employed can easily trip you up if you’re not prepared. Leaving your planning for how to pay up what you owe until after you’ve already filed your return is a dangerous road to walk down. It’s all too easy to get lumped with a tax bill you can’t pay at the end of the tax year, or payments on account that you haven’t got the cash flow to cover.

Luckily, since you’re already used to estimating your annual income, you should already have a good idea which tax bands you’ll be dealing with. If you know you’ll only be paying at the basic rate of 20%, for instance, you’re in a decent position to prepare by setting aside 20% of your earnings as they come in. That’ll keep your Income Tax covered – but there’s still more to pay!

We know, it sounds nightmarishly complicated. In practice, though, it’s all calculated automatically when you file your Self Assessment tax returns online. The main point is to keep your National Insurance situation in mind throughout the year, because Income Tax isn’t the only way HMRC dips into your pocket.

Rainy day budgeting

Cash flow crises can be incredibly dangerous when you’re self-employed, with the money flowing through your business getting choked off by late-paying customers, unreliable suppliers or unexpected costs. Even the best-prepared business will sometimes find it didn’t bring in as much money in a month as it expected. That’s what a rainy day budget is for. A good rule of thumb is to aim for an emergency cash stash that’ll tide you over for at least 3 months of your basic living expenses. It sounds like a bit of a hill to climb, but you don’t have to reach the top all at once. Just keep socking a little away regularly until you hit the summit. You might never need to fall back on your rainy day fund, but you’ll be glad of it any time you’re struck with a short-term financial disaster.

Keeping things tidy

It’s not always essential to have a dedicated business account when you’re self-employed. If you’re a Sole Trader, for instance, you might be keeping your finances simple by just using your personal bank account for your business cash. However, a separate account can be a useful thing to have when you’re keeping a close eye on how your business is doing. It’s not always easy to get a clear picture of your work finances with your personal money cluttering up the numbers. When you make payments for essential work expenses, for instance, they can bring down the profits you’re being taxed on in your Self Assessment paperwork. Keeping those finances separate makes it a lot easier to tell your allowable expenses from your personal spending so you don’t miss out on the tax relief you’re owed.

Speaking of not missing out...

With Self Assessment, it’s incredibly important to understand the connection between the money you’re spending to stay in business and the tax you owe. If you’re not letting the taxman know about all your allowable expenses, you’ll end up pouring much more than your fair share into HMRC’s pockets. Anything from professional clothing and equipment to work travel, meals and accommodation can count toward the tax relief you’re owed – but it all depends on your situation. For example, if you use the same phone for work and personal calls, only the money spent on business use can count against your taxable profits for Self Assessment. It can take a bit of legwork to make sure you’re claiming for every eligible cost, but it’s really worth getting it right. Self-employed people without a lot of business expenses to claim for in a year can actually simplify things a lot by claiming a tax-free trading allowance of £1,000 instead of working out all their allowable costs.

Keep checking back here for more money tips and updates. We’re experts at saving you cash and we’re always here to help. That’s the reason why you’re better off with RIFT.

RIFT Roundup: what it all means

• Self Assessment: A way of reporting your business income, expenses and other circumstances to HMRC when you’re self-employed.
• Class 2 National Insurance Contributions: Flat-rate payments for self-employed people with profits over a set threshold.
• Class 4 National Insurance Contributions: Payments based on the amount of self-employment profit you’re making. Separate from Income Tax.