How to budget as a freelancer

Budgeting is essential for any business, regardless of size. And while larger organisations often have dedicated finance departments, freelancers, contractors, and smaller businesses simply don’t have that luxury.

In truth, it can be challenging to know where to start when it comes to budgeting, especially if numbers aren’t your forte. So if you’re keen to learn more about this crucial aspect of business ownership, read on.

What is a budget?

A budget is a financial plan that outlines an individual or organisation's expected income and expenses over a set period. It helps in identifying how much money is coming in, how much is going out, and what it's being spent on.

Budgeting is crucial for freelancers and small businesses as it helps them manage their finances, make informed decisions, and stay on track with their financial goals. By creating and sticking to a budget, freelancers and small businesses can monitor their cash flow, avoid overspending, and save money for future investments or emergencies.

Why is budgeting important?

As a freelancer, you’re in charge of your own work. But the amount of work you do – and as a result, your income – can easily vary throughout the year, which is why budgeting is important.

Any fluctuations in earnings can be stressful, but sound financial management will help ensure you have the money needed to pay yourself, along with other overheads, like tax.

So there are many benefits of budgeting, which is why it’s worth getting started as soon as possible.

Why is budgeting important to a business?

Knowing how to budget if you are self-employed is one of the foundations of a successful business. Generating income for your business is vital – but if you’re not tracking your spending and your liabilities, there’s a chance that you don’t have the complete financial picture.

How to Create and Track Your Budget

Income and expenses

Separate personal and business money

First, consider separating your personal finances from your business finances.

This is straightforward if you work via your own limited company (which is required to have its own business bank account), but it’s also simple for sole traders. All you need to do is open a separate bank account which you use solely for your business income and outgoings.

Why do this? In short, it prevents any crossover and confusion between your personal finances and money in your business, giving you greater visibility.

Tally up your personal outgoings

You’ll need to know what your outgoings look like. Tally your committed personal expenses – like rent or mortgage payments, council tax, utility bills, etc. Then, factor in tax (more on that later), along with any business overheads, like travel, equipment and rent on your office.

Once you know what your outgoings are, you’ll have a better idea of how much you need to earn and how much you can spend every month comfortably.

Tax Considerations

Your committed outgoings also include tax liabilities, so you’ll need to calculate the percentage of tax you’ll be liable for, based on your income.

You can then start to put aside a percentage of your income, so that your tax is accounted for. In other words, there aren’t any nasty surprises when paying your tax bills.

Which tax you’ll need to pay can depend on your business structure. For example, if you’re a sole trader, Income Tax and (if you’re registered) your quarterly VAT bill must be considered. You must also factor in Corporation Tax if you operate through a limited company.

Budget conservatively

Overestimating your outgoings or overheads by around 10% and underestimating your expected income by the same margin will help prepare you for a quieter month, and should give you enough leeway to account for any unexpected costs.

Build up a safety net

This brings us nicely to another budgeting tip. If you can, try to build up a safety net to see you through any periods where your income varies.

If you have some money left over at the end of each month – and only after you’ve accounted for all your expenses – you could start a rainy day fund. Nowadays, most bank accounts have dedicated savings spaces for precisely this reason.

Maximise expenses

To assist your budgeting, it’s important to make sure that you operate in a tax efficient – yet compliant – manner. For example, there are certain business expenses that you can claim back to reduce your tax bill, like travel costs, or work equipment.

If you work via your limited company, by maximising legitimate business expenses, you’ll lower your profit and, therefore, your Corporation Tax bill. If you operate as a sole trader, your Income Tax liability will be reduced by claiming allowable expenses.

However, what you’re allowed to reclaim depends on whether you operate as a sole trader or through a limited company. You can learn more with our guide to contractor expenses or our guide to sole trader expenses if you’re a sole trader.

Get on top of VAT

Keeping on top of VAT will also help when it comes to budgeting. If your business is registered, you can reduce your quarterly VAT bill by claiming back VAT on certain business purchases, including travel and fuel costs, and on some business assets.

To conclude, while getting on top of your finances can be daunting, with the right approach, it’s relatively straightforward. Ultimately, for many businesses, it’s the difference between success and failure.

What do you do if you go over budget?

If you’d like to learn more, you’ll find self-employed budget templates and budget planners online, from the FSB, for example, or the MoneyHelper budget planner from the MoneyHelper UK website.

To hear how Caroola can help with your accounting requirements, please arrange a callback and a member of the team will be in touch.