Managing your money when you’re self-employed

Self-employment can mean irregular work and income, so budgeting is more important than ever.

Taking control of your record-keeping, tax, spending and saving will help you live more and stress less.

Our free budget planner should help with this.

Keeping your personal and business finances separate

When you’re self-employed, it’s a good idea to keep your personal and business finances separate. This means you’ll need to create two different budgets.

This will help:

• you track your business’s performance
• simplify the tax return process

It may be easier to keep your finances separate if you:

Have separate bank accounts

Although you may be able to use a personal bank account for work-related transactions if you’re a sole trader or a partnership, a dedicated business one may be preferable. Many business bank accounts include support features you may find useful, such as accountancy software to simplify invoicing and tax.

Keep on top of shared expenses

You might not be able to split all of your expenses neatly into either personal or business categories. Some expenses may be shared e.g. if you work from home, your energy costs will be partly personal and partly business.

It’s important to keep accurate records of these expenses, including any receipts, as you may be able to deduct these business costs from your profits and reduce your tax bill.

Pay yourself a salary

You’ll probably find it easier to stick to your budget if you pay yourself a salary each month. This should stop you dipping into your business account when personal costs arise.

If you’re a sole trader or a partnership, you can simply set up a standing order into your personal account. If you’re a limited company, you’ll need to pay your salary through PAYE.

Don’t use personal money to cover business costs

Set a strict budget for your business based on your earnings to avoid using personal money to cover work-related expenses.

It’s easy for newly self-employed people to get caught out by an unexpected tax bill. To avoid this, it’s a good idea to set aside a percentage of your income to cover income tax and national insurance.

You can get an estimate of your tax bill using the free self-assessment calculator on the government’s website.

Self assessment

When you’re self-employed, you’re responsible for paying tax and national insurance on your income. If you expect to earn more than £1,000 a year, you’ll need to register for self assessment.

Business expenses for the self-employed

You may be able to reduce your tax bill by making sure you claim allowable business expenses. This cuts the amount of your profits HMRC can claim tax on.

Many business expenses are tax-deductible, including:

• travel costs
• clothing costs
• office costs
• staff costs
• training costs
• marketing costs
• insurance costs
• bank charges
• business premises’ costs
• accountancy fees
• work-related mobile phone costs
• work-related internet costs

And if you work at home, you can also claim part of your household bills.

To minimise your tax bill, find out which business expenses you can claim and make sure you track them fully.

The HMRC YouTube channel features lots of useful videos to help you get to grips with the self-assessment process.