Finances for freelancers: expert guidance on budgeting, saving, and staying on top of taxes

Freelancers have more flexibility and control over their work than most, but with that control comes the need to manage finances that don’t follow a predictable monthly cycle. It’s empowering, but it can also feel like a lot of responsibility. 

This guide covers everything you need to know about taking control of your finances when working for yourself, including planning around an irregular income, what you need to know about tax, and how to set up a business bank account.

Taxes for freelancers

Registering and handling self-assessment taxes

HMRC expects you to take the lead on your tax responsibilities if you're earning money through self-employed work. That means registering as self-employed, filing a Self Assessment return each year, and making sure you pay the correct amount on time.

The first step is registering with HMRC. You’ll need to do this by October 5 in your second tax year, so if you started freelancing in June 2024, you’ve got until October 2025 to let them know.

After that, you’ll need to file your Self Assessment return every year by January 31. That’s also when your first tax payment is due. Depending on how much you owe, you might also need to make ‘payments on account’ towards the following year’s tax bill – one in January, and one in July.

Unlike with salaried positions, where you’re the employee of a company, there’s no PAYE system to do this for you when you’re a freelancer. You need to keep records, track your income, and set aside enough to cover what you owe in taxes. Putting away 25-30% of everything you earn will cover Income Tax and National Insurance (NI) payments, but this will be more if you earn over the higher-rate threshold.

You can use the government's online Self Assessment tax bill calculator if you’re unsure how much tax you need to pay based on your earnings. This tool works on the assumption that you’re entitled to the standard Personal Allowance, and asks for details of your:

• Profits from self-employment;

• Rental income from property you own and let;

• Income from a State Pension or occupational pension;

• Income from any paid employment

Note: If you’re repaying a student loan, you’ll need to specify your loan plan type when completing your return. Once submitted, HMRC will automatically calculate any repayments based on your income and include the amount in your final tax bill. This means your student loan repayments are collected alongside your Income Tax and National Insurance, so it’s important to factor them into your business savings pot.

Here’s an overview of the current tax bands in England, Wales, and Northern Ireland for the 2025/26 tax year.

*If you earn more than £100,000, your personal allowance will be reduced by £1 for every £2 you earn over the threshold, meaning that you’ll pay tax on all the income you earn if it’s over £125,140 per year (£12,570 x 2 = £25,140).

Opening a separate business bank account can make staying on top of this much more straightforward. It keeps your freelance income away from personal spending, gives you a clear picture of what you’ve earned, and makes it easier to save what you’ll need to pay your tax bill when the time comes. You can compare sole trader bank accounts to find the best fit for your freelance needs.

Making Tax Digital: What’s changing?

From April 2026, Making Tax Digital for Income Tax will be introduced for sole traders and landlords registered for Self Assessment tax returns with incomes over £50,000. This means submitting your income and expenses quarterly through compatible software instead of once a year. If your income is between £30,000 and £50,000, you’ll follow suit from April 2027.

The GOV.UK website provides more information about Making Tax Digital, including guidance on timelines and eligibility criteria.

What about National Insurance for freelancers?

When you’re self-employed, you pay National Insurance alongside Income Tax. You need to report and pay it through your Self Assessment tax return.

There are two types of National Insurance contributions for freelance workers – Class 2 and Class 4:

Class 4 NI contributions are mandatory if your annual profits are over £12,570, unless you’re over the State Pension age, when you become exempt. 

For 2025/26, the Class 4 rates are:

• 6% on profits between £12,570 and £50,270

• 2% on profits above £50,270

When you file your Self Assessment tax return, HMRC calculates these contributions automatically, but you still need to set money aside to cover them in your annual budgets. 

Class 2 NI contributions used to be mandatory for self-employed workers, but this changed in April 2024. Now, if your profits are £6,845 or more, you don’t have to pay Class 2 NIC, but HMRC will treat them as being paid, so your NI record (and entitlement to benefits like the State Pension) is protected.

If your profits are below £6,845, you won’t pay Class 2 NIC automatically, but you have the option of making voluntary contributions of £3.50 a week (the 2025/26 rate) to maintain your NI record. If you’re not being paid through other means of employment, you may choose to do this to safeguard your finances for the future.

Claiming expenses and optimising your tax obligations

One of the main benefits of being a self-employed freelancer is that you can deduct legitimate business expenses from your taxable income.

This is key to keeping your tax bill in check, but only if you know what you can and can’t deduct.

Example: how business expenses can reduce your taxable income

Let’s say you’re a self-employed freelance graphic designer. With operating costs going up and profit margins getting harder and harder to maintain, you want to be sure you’re not handing out your income unnecessarily.

Your total income for the year is £42,000.

Your allowable business expenses are:

• Laptop and design software: £2,500

• LinkedIn Premium subscription: £250

• Phone and internet: £130

• Co-working space membership: £1,200

• Office supplies: £320

• Business cards: £40

• Travel to client meetings: £360

This means your total expenses are £4,800.

To calculate your taxable income, you do income – allowable expenses = taxable profit. So, in this case, it would be:

£42,000 - £4,800 = £37,200

Income Tax and National Insurance owed, based on 2025/26 rates:

• Personal allowance: £12,570

• Taxable income after allowance: £24,630: Tax at 20% (the basic rate): £4,926, Class 4 National Insurance at 6%: £1,478

After allowances have been factored in, your total tax and National Insurance contributions (NIC) owed would be £6,404 (£4,926 in Income Tax and £1,478 in NIC).

If you hadn’t deducted those £4,800 in expenses, they’d have been taxed alongside your taxable income. Let’s calculate what you’d owe again.

The income remains the same at £42,000.

Taxable income after the allowance: £29,430.

Income Tax at 20%: £5,886.

Class 4 National Insurance at 6%: £1,766

So, if you didn’t deduct the allowable business expenses, your tax bill would be £7,652 rather than £6,404.

That’s £1,248 back in your pocket that you can reinvest in your freelance business or put aside in a business savings account. 

Budgeting and financial planning for freelancers

Budgeting guidance for freelancers

1. Start by knowing your baseline operating costs

Figure out the minimum you need each month to stay afloat. That includes rent or mortgage, utilities, food, transport, and any fixed business costs. Add 25-30% of your expected income for tax, and you’ve got your monthly baseline.

2. Budget based on your average income, not your best month

Look at your earnings over the last 6–12 months and calculate the average. That’s the number you need to plan around, not the high points. If you’re new to freelancing, estimate conservatively until you build up more data based on real monthly earnings and client stability.

3. Pay yourself a regular ‘salary’

Instead of dipping into your freelance income as it comes in, transfer a fixed amount into your personal current account each month – enough to cover your own baseline, plus a bit extra if you can manage it. Leave the rest in your business account to cover tax, allow for reinvestment, and help during slower periods.

Building a financial safety net

With budgeting in hand, you’re far better positioned to start building your financial fallback. This buffer is a lifeline because when you work for yourself, there’s no sick pay or redundancy payouts.

Due to the unpredictability of freelance and gig work, you may choose to make your safety net a little more robust than usual by following these steps:

1. Aim for at least three months of essentials

Start by calculating the minimum you need to cover rent or mortgage, bills, food, and key business costs, then multiply that by three. That will give you a healthy buffer if things don’t go to plan. If that feels unachievable right now, start with one month and build up from there.

2. Keep emergency funds separate from day-to-day spending money

Your personal spending and savings could sit in a different account from your emergency fund - opening a separate business savings account can help keep your buffer ringfenced.

3. Make saving part of your system

You could treat your safety net like a recurring expense rather than an optional one to help build the habit. Add it to your budget, automate the transfer if possible, and increase the amount when your income allows.

Setting rates and getting paid as a freelancer

Knowing what to charge and making sure you get paid can be some of the trickiest parts of freelancing. There are no salary bands to guide you and no HR department to chase payments.

That’s why it’s crucial to set rates that reflect the full cost of running your business and establish systems that protect your time, income, and peace of mind.

Setting rates

It may be tempting to guess the going rate, undercharge, or base your prices on what others are doing. But if you want your business to last, your rates need to be rooted in your reality.

We say ‘your’ reality because the perfect freelance rate-setting formula doesn’t exist. You’re an individual with your own skills, experience, and expertise working in a particular location and industry. 

Instead, you need to ask yourself questions like:

• What operating expenses do I need to account for?

• What is the going rate for the services I provide?

• Can my hourly rate change depending on the complexity of the project I’m working on?

Here’s what our experts recommend when setting your rates as a freelancer:

1. Price with pragmatism

To find your baseline rate, calculate your monthly income target by factoring in living costs, taxes, expenses, and savings goals. Then, determine how many billable hours or days you can realistically work. If you earn less than this rate, you’re effectively working at a loss.

Read our full guide for more information on keeping track of business expenses.

2. Factor in the hidden time

Working isn’t just the time spent on client projects – it also includes admin, pitching, revisions, chasing invoices, and more. As a freelancer, much of this time isn’t paid. Your rate needs to cover all these tasks, not just delivery, or you’ll end up earning less than it seems.

3. Use the right pricing model

Hourly rates are standard for freelancers, but aren’t always the best. For larger projects, value-based or project rates can reward efficiency and experience. Whichever model you use, be clear and upfront with clients Don’t forget, you can always use multiple pricing models for different projects or services. You’re in control, so make things work for you and your business.

How to get paid on time (and in full)

Chasing invoices can be a pain, but when you’re self-employed, unpaid work can be the difference between staying afloat and calling it quits. The good news is, there’s plenty you can do to make late or partial payments less likely.

1. Set expectations clearly from the outset

Before starting any project, agree on the fee, timeline, payment terms, and what happens if those terms aren’t met. Put it in a contract or an email chain so the terms are in writing, as ambiguity is the enemy of prompt payment.

2. Invoice promptly and professionally

Professionalism incites professionalism, so send proper invoices when your work is complete. Make sure any payment requests are clear, correct, and include:

• Your name and business details (trading name, address, registration number, etc.)

• The client’s name and business address

• A unique invoice number

• The total amount due, with VAT, if applicable

• Your payment terms (e.g. ‘Payment due within 14 days of the stated invoice date’)

• Your bank details (remember to provide your business bank account details if you have separate ones)

3. Take deposits for larger jobs or new clients

If it’s a big or long-running project, ask for 25-50% up front. It protects your time, covers early work or prep, and helps manage cash flow. 

Deposits can also be smart when working with new clients who don’t have a track record of paying on time (or any track record at all). It sets expectations, can filter out unreliable leads, and provides a financial buffer if things go pear-shaped.

Understanding your rights on late payments

Late payments are disruptive and can impact your cash flow. But UK law is on your side, and it’s worth knowing what you’re entitled to if a client doesn’t pay on time.

The basics

Under the Late Payment of Commercial Debts (Interest) Act, freelancers and small businesses can:

• Charge statutory interest at 8% plus the Bank of England base rate

• Add a fixed fee for debt recovery: £40 for invoices up to £999, £70 for invoices between £1,000 and £9,999, £100 for invoices over £10,000

These charges apply after a pre-agreed period has elapsed (typically 60 days for business transactions). If you don’t agree on a payment date with your clients, the law says that the payment is late 30 days after they receive the invoice from you, or you deliver the goods or service (whichever is later).

You don’t need to write these charges into your contract as they apply automatically under UK law. But stating your right to add them to your payment terms can act as a deterrent.

If your invoice is overdue beyond the agreed payment terms, you’re within your rights to start applying interest and fees. First, politely remind the client, then follow up with a formal late payment notice if needed.