Accounting for freelancers. It might sound like something only accountants understand, but it's essential for every self-employed person to keep a grip on their finances. Whether you're just starting out or have been in business for years, clear accounting is not only mandatory but also saves you a lot of stress. In this article, we'll dive into the basics, give practical tips, and discuss how you can make it easier for yourself. Spoiler: there's no need for spreadsheet hassle.
Why is accounting so important for freelancers?
As a freelancer, you are solely responsible for your finances. No boss, no HR department, no accountant handling everything behind your back. Accounting isn't just about obligations, like VAT returns, but also helps you gain insight into your income, expenses, and profit. This way, you know exactly where you stand and can adjust where necessary.
Fun fact: A whopping 42% of freelancers find bookkeeping the least enjoyable part of running a business. Sound familiar?
What happens if you don't keep records?
Not keeping records is not an option. No accounting = no accountability to HMRC. That means fines, additional assessments, and ultimately financial misery. It's that simple.
How do you start your accounting as a freelancer?
Okay, you're ready to start. But where do you begin? Here's a step-by-step plan:
- Open a business bank account: Keep personal and business strictly separate. This makes tax returns and maintaining an overview much easier.
- Choose an accounting method: Will you work with separate Excel sheets or invest in software? Put the magazines aside, because we recommend the latter.
- Keep track of your receipts and invoices: Use digital tools to avoid paper clutter.
- Schedule regular accounting times: Don't wait until HMRC comes knocking, but make it a habit to update your figures regularly.
How do you choose the right accounting software?
Accounting software specifically for freelancers makes your life so much easier. Think of bank integrations, automatic VAT calculations, and error-free invoices. When choosing, pay attention to:
- Ease of use (you're an entrepreneur, not an accountant).
- Functionalities that suit your business.
- Price (must fit your budget).
Stress-free VAT returns
Doing your first VAT return can be daunting, but it's actually not that bad. As a freelancer, you usually have to submit your VAT return every quarter. Here are the basics:
Which VAT rates apply to you?
Most freelancers work with the standard rate of 20%. But there are exceptions, such as 5% (for example, for domestic fuel and power) or exemptions (such as healthcare providers).
What about the Flat Rate Scheme?
The Flat Rate Scheme is for businesses with a turnover of up to £150,000 per year. This allows you to pay a fixed percentage of your turnover to HMRC, rather than calculating VAT on every sale and purchase. Note: you don't reclaim VAT on purchases, except for certain capital assets.
Useful tips for your administration
Keeping your administration up to date doesn't have to be a full-time job. Here are some tips:
- Work with templates for your invoices.
- Store receipts digitally (an app like Booqdoo can help you).
- Use automatic reminders for outstanding invoices.
What if you're considering outsourcing your accounting?
Doing it yourself not your thing? No problem. Hiring an accountant can save you a lot of work and stress. Make sure you choose someone reliable and discuss clear agreements about what they will do. Often, you can do some parts yourself and outsource others, such as the annual accounts.
How much does an accountant cost?
Costs vary, but on average you pay between £60 and £90 per hour. For simple administration, you can expect to pay around £400 to £1,000 per year.
The five biggest accounting mistakes freelancers make
Prevention is better than cure. You'd better avoid these common mistakes:
- Losing receipts and invoices (use a digital tool).
- Forgetting to save VAT (set it aside).
- Not setting aside a reserve for taxes.
- Filing returns late.
- Not checking if your invoices meet HMRC requirements.
Automating accounting: Is it possible?
Yes, of course it is! With a tool like Booqdoo, you can almost fully automate your accounting. Here are a few benefits:
- All transactions automatically imported via a bank integration.
- Automatic VAT returns without errors.
- Instant insight into your cash flow.
Did you know that entrepreneurs save an average of 8 hours per month by using accounting software?
Frequently asked questions about accounting for freelancers
How long do I need to keep my records?
HMRC requires you to keep your records for 6 years. For some sectors, such as construction, this may be longer.
Can I do my own accounting?
Yes, you certainly can. But you need to know what you're doing. Accounting software makes it a lot easier.
What should be on an invoice?
Make sure your invoices always meet HMRC requirements, such as:
- Your full business details.
- Date and unique invoice number.
- Description of goods/services supplied.
- VAT amount and VAT registration number (if VAT registered).
What are mandatory components of accounting?
Some mandatory components include:
- Purchase and sales invoices.
- Copies of tax returns.
- Bank statements.
Accounting? Make it simple with Booqdoo
Why make it difficult when it can be easy? Whether you're a coach, hairdresser, therapist, or freelancer, Booqdoo makes accounting child's play. Combine your financial administration with your appointment management, webshop, and website – all-in-one. Say goodbye to separate invoicing apps and stressful VAT deadlines. Your focus remains on doing business, we'll take care of the rest.