Freelancer - saving for tax

serious_saver

Hi all,

After years of contract work I finally went properly freelance in April of this year.

I'm still trying to establish myself so I haven't made masses of money. However as I start to get more work I am going to have to make sure I save enough for the tax-man to take his share.

If there are any established freelancers on here I would appreciate some advice on,

-How much to set aside
-Best places to save this money.
-Any other useful hints and tips

Pennywise

A very rough rule of thumb is to set aside a quarter of what you draw out. You can't be exact because of the tax and NIC rates and thresholds, and tax rule differences for capital purchases, etc., but if you save a quarter of what you take, you're going to be in the right ball park for the eventual tax bill.

Putting it in a min cash ISA would be a good idea as they tend to be higher interest rates (and no tax) on relatively small sums of money. Just make sure you choose one that lets you withdraw freely as you'll need to pay the tax twice per year once you're passed the first year.

All this is assuming you're a sole trader and not a limited company.

If you want a more accurate estimate, then you need to beef up your book-keeping so that you can keep tabs on what profit you're making as the year proceeds and can then estimate the tax more accurately. A good piece of software to do this is freeagent which also works out your taxes etc as you go along.

serious_saver

Thank you for all the advice. I have been trying to save about 25%. Haven't quite made it yet but I'm getting closer.

I had never heard of freeagent but it looks like they have a free trial so I will give it a try.

chrismac1

Sounds about right, Pennywise. When I send clients quarterly dividends, I include a "Recommended Mimumum Company Bank Balance" which is calculated as:

Corporation Tax bill (if unpaid) + Corporation tax for current year + Normal VAT bill for quarter.

That's for limited companies, something similar will work for sole traders.

sv650s

Serious_Saver, now you aren't been paid by a rigid employer, the best thing you can do for savings is to move your money offshore. Have a tax-haven corporation, with a presence in the UK, and watch your investment in a new company make your savings skyrocket!