Let's talk about money and how to manage it

With expert advice from accountant Claire Owen-Jones

As I write my newsletter this week, I am in bed with a coffee while my son watches Peppa Pig next to me. Over the past couple of weeks, he's decided that he prefers a 5.45am wake-up over his usual (and more civilised 7.15am) and I am taking it brilliantly. *Says through clenched teeth with mad hair and half closed eyes.*

So early mornings aside, this week's newsletter is dedicated to money and how best to run a freelance business. As I am not a financial advisor, I have enlisted the help of a professional to answer the harder questions: Claire Owen-Jones of Loud and Clear Accounting who works specifically with creative freelancers. Claire has some great advice and we’ll cover everything from maternity/ paternity pay allowance, to what expenses to claim, how much tax to save and the sad truth about how the government has left many freelancers totally forgotten during the Covid-19 crisis.

Even if some of these topics don't affect you right now, I hope you can keep this newsletter as a reference point for the future and refer to it whenever you need it.

But first of all I wanted to share some simple ways I run my own business accounts and what I've found works well over the past four years.

Consider hiring an accountant

Unless you are very tax savvy, I would always recommend hiring an accountant to help you navigate the choppy waters of tax. I pay my accountant £70 a month (which can be claimed as an expense against my business) and this covers the cost of organising my end of year accounts and helping me with any ad-hoc requests such as setting me up for maternity pay. They will usually also manage other stressful jobs like calling HMRC when necessary - which is a big bonus.

I found this was the best option for me as I had absolutely no idea what I was doing when I started out and I needed clear guidance. I also didn't want to make any silly and expensive mistakes. I've heard some truly terrible horror stories where freelancers have faced bankruptcy - just from not managing their accounts and saving for their taxes properly. Like the old saying goes, there are two things you can never avoid and that's death and taxes.

Keep track of your invoices

I use a simple Excel spreadsheet to keep track of my invoices, tax and revenue. It includes a few simple columns with my invoice number, the date the invoice was sent, a description of the work, the fee and finally a column to note when the payment is received. I highlight any outstanding payments so I know to keep an eye on them and chase when the deadline approaches.

A simple Excel formula in the tax column automatically populates the tax deduction and my revenue for each month. (My Excel sheet is set to deduct 30% from each payment as this works for the amount of money I earn, but Claire will talk more about how you can work this out for yourself later on. I then keep a track of my expenses in a separate tab in the same Excel sheet. Once the tax year has ended, I just send my Excel document straight to my accountant and he has all the information he needs to create my end of year accounts.

If Excel isn't your thing, many freelancers prefer to use accounting software such as Xero, QuickBooks, FreeAgent and Wave which will do all the hard work for you - including creating invoices and reminding you when they're due.

Separate tax from your earnings

As I'm set up as a Limited company, my payments are paid into my business account. Once a payment is received (hurrah) I deduct 30% to be consistent with the workings in my Excel document and transfer this immediately into my business savings account. This ensures I always save enough tax and never consider this money as my own - which is a very tempting trap. From here, I transfer the remainder into a personal account where all of my direct debits come out for my mortgage, phone bill, nursery fees etc.

I then pay myself a weekly salary from my main bank account into my Monzo account which is based on my average earnings. I like Monzo as it syncs up with an app on my phone and shows me how I spend my money each month with a handy pie chart - this is also really helpful when it comes to filling out your expenses. If I earn more than expected on a particular month, I try to just consider this a bonus and leave it in my main bank account to build up as a buffer of savings. This helps with cash flow if I hit a dry spell or have any problems with clients paying late.

It might sound a bit phaffy, but it works and since going freelance, I've always had enough money to pay my tax each year while having savings of some sort. It's also always a nice surprise to find out that you've saved more money needed for your tax bill (which is nearly always the case). I always use this extra cash to spend on things I need for my business like a new laptop or redesigning my website.

Don't forget about your pension

Growing old may seem like a million miles away, but it's so important to set yourself up with a pension as it can easily get forgotten when you don't have a HR department organising it for you. It's a boring but essential job and takes no time at all to organise. Choose a provider, set up a monthly direct debit and forget about it - it doesn't have to be a huge amount but even something is better than nothing.

Money can be the one thing that ruins the freelance experience so getting organised will help you feel happier and less stressed. There is lots more I could go into on this subject so I may well do a part two. But for now, I'm going to hand things over to a financial expert, Claire.


YOUR QUESTIONS ANSWERED:

Claire Owen-Jones of Loud and Clear Accounting is an AAT licensed accountant based in Cardiff with a first-class Fine Art degree to boot. I asked Claire to answer some essential questions that affect freelancers and parents…

CAT: What rights do freelancers have to maternity and paternity pay?

CLAIRE: As a freelancer, your rights to maternity pay are very similar to those who are employed. The differences are dependant on whether you need to apply for maternity allowance or Statutory Maternity Allowance (SMP).

You can claim for Paternity pay if you are employed through your own Limited Company or an Umbrella Company, but there is currently no equivalent for those who are self-employed.

CAT: How does this differ between sole traders, limited companies, and umbrella companies? 

CLAIRE: If you are self-employed you will need to apply for maternity allowance.

Maternity allowance is paid out for 39 weeks and is paid directly into your bank account.

To qualify, in the 66 weeks before your baby is due, you need to have been self-employed for at least 26 weeks. And you need to have been earning a minimum of £30 per week for 13 of those weeks. This might catch out those of you who have one child, not worked whilst off on maternity leave and then get pregnant again and need to reclaim before restarting the business.

If you qualify, the full amount of maternity allowance is £151.20 a week and to be able to claim this you need to have paid Class 2 National Insurance for 13 weeks before your baby is due.

If you haven’t paid the required amount of Class 2 National Insurance (which is common as your Class 2 payments are made when you pay your tax bill), you will be initially offered the lower figure of £27 per week. The Department for Work and Pensions (DWP) will write to you and give you the chance to pay any shortfall - so if you get the letter offering you £27 per week, do not panic.

Maternity allowance has the benefit of being tax free, so you do not need to enter this money onto your tax return.

As I mentioned above, there is sadly no paternity allowance equivalent.

If you are employed by your own Limited Company or an Umbrella Company, then you should be able to claim Statutory Maternity Pay (SMP).   

Like maternity allowance, SMP is also paid out over 39 weeks. However, unlike maternity allowance SMP needs to go through your payroll which means that it is taxable and the usual national insurance, PAYE and pension deductions will apply.

If your Limited Company has other employees, the SMP repayment will reduce your overall PAYE liability, leaving you with the money to pay yourself. If you are the only employee, it may be worth applying to have the SMP paid to you in advance as otherwise you will be forced to wait until the tax year end to reclaim it. Which, cash flow wise, is certainly not ideal.

To qualify for SMP, you need to be paid an average of £120 per week and have worked for your Limited Company/Umbrella Company for at least 26 weeks continuing into the qualifying week, which is usually the 15th week before your baby is due.

It is worth noting that the £120 and the “worked for” means you need to have been paid this through a payroll scheme. Dividends do not count as income when you talk about SMP as you do not pay national insurance on them.

If you qualify for SMP, for the first 6 weeks your Limited/Umbrella Company will need to pay you 90% of your average weekly earnings and then £151.20 or 90% of your average weekly earnings (whatever is lower) for the remaining 33 weeks.

Paternity pay has the same qualification rules, but you only get to choose to take one or two weeks off. The pay for these one or two weeks is £151.20 per week or 90% of your average weekly earnings.

If both parents meet the qualifying criteria, then you can apply for Statutory Shared Parental Pay.  

CAT: What other allowances are available during maternity/ paternity leave and how do you claim for them?

CLAIRE: It may be worth me mentioning that as maternity allowance is a benefit, it can impact other benefits that you may already be claimed for such as Universal Credit or Carer’s Allowance for example.

If being on maternity leave and claiming SMP, greatly reduces your income then it may be worth taking a look at HMRC’s Benefit Calculator to see if you are able to claim Universal Credit, Working Tax Credits or Income Support.

CAT: What advice do you have for freelancers who are pregnant/ or have a pregnant partner, and are unsure of how to prepare for their leave? What is most important?

CLAIRE: For a lot of freelancers, it is the Keeping in Touch (KIT) days that cause the most concern. Not many of us can wind down or walk away from our business for nine months.

Regardless of whether you claim maternity allowance or SMP, you are only allowed 10 KIT days.

If you are on maternity allowance, the KIT days include any work you do for an employer as well as your own self-employment. However, if you are on SMP, whilst you can only do 10 KIT days for your employer but you could work on a self-employment side project and be unaffected (just make sure it is not the same business as your Limited Company).

You may want to look at getting another freelancer to help on a subcontractor basis during your leave to help to lighten your workload.

When you prepare your tax return ahead of going off on maternity leave, if you know your profits are likely to decrease, remember to reduce your payments on account to reflect this so you do not overpay tax.

CAT: In terms of expenses, what can we claim for and what do many freelancers often overlook or forget to include?

CLAIRE: We’re good at the obvious stuff that has regular direct debits or we know is definitely linked to our business such as subcontractors, graphic design, materials needed to make our products.

But I find it is often the expenses that we don’t physically pay money out on that freelancers can often forget about.

These include mileage, use of home and telephone costs (especially home broadband). These do vary depending on whether you are self-employed or a Limited Company so if you have an accountant make sure you ask them what else you can be claiming for.

Also, make sure you check your online shopping such as Amazon, for smaller items such as business books that you may pay for using your personal account and forget about.

CAT: Do you have any advice for the millions of forgotten freelancers who have been left without financial help from the government due to Covid-19?

CLAIRE: Check with your local authorities and professional bodies as smaller grant schemes are popping up every now and again.

But other than that, no. As someone who works with freelancers in creative industries, it has been heart breaking to see how hard this sector has been hit and that’s before you get to the newly self-employed and the forgotten Directors.

It’s at this point that I normally launch into a speech on how the creative industry/the Arts are vital to our history and how it’s their work that will define our memories of how this period in time will be seen and defined for years to come, but I feel I may be straying off topic somewhat.

CAT: How do you advise freelancers ensure they are saving enough tax from every payment they receive? how can we calculate this? 

CLAIRE: This is a big question and one that I have a blog that goes into this is far more depth: https://www.loudandclearaccounting.co.uk/blog/post/6898/How-much-money-should-I-set-aside-to-pay-my-personal-tax-bill/

But in short, if you have a serviced based business so one where the main expense is your own time, then aiming for 30% is a good place to start.

If you just starting out and your profits are likely to be under the personal allowance, then save around £500 and you should be okay because all you’ll have is national insurance to pay and no payments on account.

If you have a paid job that takes you up to the higher rate band and your freelance work is extra, then put aside around 50% for tax.

For more personalised advice on your business and family situation, you can contact Claire directly here.


Thanks again for supporting The Freelance Parent. If you found this edition useful, feel free to reply and let me know and share with your fellow freelance friends. If you want to support TFP, you can also buy me a virtual coffee here.

Until next time…