Common Accounting Mistakes Freelancers Make and How to Avoid Them
Freelancing offers freedom, but with that independence comes the responsibility of managing your finances effectively.
From staying on top of tax deadlines to keeping business and personal accounts separate, there’s a lot that can go wrong if you’re not careful.
That’s where IN Accountancy steps in – with years of experience in helping freelancers, we’ve seen firsthand the common accounting mistakes freelancers make, and more importantly, how to avoid them.
This blog will walk you through those pitfalls with tips on how to keep your accounts in tip-top shape. 💼
What are the most common accounting mistakes freelancers make?
1. Mixing Personal and Business Finances
One of the most frequent mistakes is blurring the lines between personal and business expenses. It might seem easier to use one bank account for everything, but come tax season, things can get messy quickly. Sorting out what’s deductible and what’s personal becomes a time-consuming chore.
How to avoid it:
Open a dedicated business bank account. Not only will it simplify your bookkeeping, but it also helps you track your business cash flow more effectively. If you’re unsure where to start, we at IN Accountancy can guide you through the process of setting up your finances properly.
2. Poor Record-Keeping
Lost receipts and incomplete records? These can cause headaches when it’s time to submit your Self Assessment. Whether it’s underestimating income or overlooking expenses, poor record-keeping can lead to costly errors, HMRC fines or even in you paying more tax than you need to 😱
How to avoid it:
Maintain clear and organised records from the start. Digital tools like accounting software such as Xero can be a lifesaver, helping to track income, expenses, and invoices.
If you need advice on what tools are best suited for freelancers, check out our Accountants for Freelancers page. We’ve helped countless freelancers streamline their bookkeeping, ensuring they never miss a beat.
3. Misunderstanding Tax Deadlines and Obligations
Freelancers often juggle multiple clients and deadlines, making it easy to overlook tax deadlines. Missing important dates could result in penalties and interest being charged on any tax liability. Plus, many new freelancers aren’t aware of their VAT responsibilities or what National Insurance contributions they owe.
How to avoid it:
Mark key deadlines in your calendar and file your tax returns early – you can file your VAT returns or your self-assessment tax returns the day after the end of the period they relate to but you still won’t need to pay any tax due until the deadline day which is more than one month later for VAT and nine months later for self-assessment or corporation tax!
Need help navigating the tax landscape? IN Accountancy can help you make sure you never miss a date. For more on this, take a look at our blog on Reducing your Tax Liability for small business owners.
4. Failing to Set Aside Money for Taxes
Many freelancers forget to put aside enough for their tax bill, especially if they’ve had a successful year. It can be a shock when HMRC sends you a larger bill than expected, and without savings in place, you might struggle to pay it off. Don’t forget about payments on account – this can be a particularly bitter pill to swallow the first time you encounter it, especially if it comes as a surprise. Here’s a link to one of our videos on this subject: What are Payments on Account?
How to avoid it:
It’s a good rule of thumb to set aside at least 25-30% of your earnings for taxes. If you’re unsure how much to save, having an accountant like us at IN Accountancy can make tax planning stress-free.
If you follow our top tip in point 3 above and file your returns early, you will always know in advance of the deadline how much tax you will have to pay, and will at least have some time to put a plan in place!
Remember also when pricing your services that your rate needs to take general expenses, sick pay, holiday pay, taxes and pension contributions into account – read our Guide to Pricing for Freelancers for further details on this important subject.
5. Underestimating the Importance of Cash Flow Management
Freelancing often means irregular income. Some months are booming, while others may be quieter. Without proper cash flow management, it can become difficult to cover your ongoing expenses during lean periods.
How to avoid it:
Keep an eye on your cash flow by forecasting your income and expenses. Planning for those slow months will ensure you stay financially stable throughout the year. IN Accountancy can assist in developing a cash flow strategy that suits your unique freelancing business.
Download our Ultimate Guide to Freelancing here for more tips like this.
6. Neglecting Pension Contributions
Many freelancers focus so much on day-to-day finances that they forget about long-term planning, including pensions. Without the structure of an employer-backed pension, it’s up to freelancers to save for their future.
How to avoid it:
Start small but start early. Set up a personal pension and consider other tax-efficient savings options like ISAs. And, if you are running your freelancing business as a limited company, making employer pension contributions is a really tax-effective way to save while reducing your corporation tax liability at the same time!
Need help sorting through your options? We’re happy to help with pension advice as part of our service for freelancers.
7. Not Understanding IR35 Rules
IR35 is a tricky piece of legislation that affects freelancers who provide services through a limited company. If you’re not compliant with IR35, HMRC may consider you as an employee for tax purposes, which could result in higher taxes and penalties.
How to avoid it:
Make sure you understand how IR35 applies to your contracts. If you’re unsure, take a look at our Understanding IR35 guide for more information. IN Accountancy can assess your contracts and help ensure you’re operating within the rules.
How can Freelancers avoid making these mistakes?
As you can see, staying on top of your finances involves more than just sending out invoices. But don’t worry – you don’t have to do it all on your own. By partnering with an accountant like IN Accountancy, you’ll not only avoid these common mistakes but also benefit from expert advice tailored to your freelance business.
From helping you separate your business and personal finances to ensuring you meet tax deadlines and cash flow challenges, we’ve got your back. Ready to simplify your accounting and let us do the heavy lifting? Check out our services for freelancers here and get started today!
Final Thoughts
Freelancing is rewarding, but it comes with its own set of challenges – especially when it comes to managing your accounts. Avoiding the most common accounting mistakes freelancers make will save you time, money, and stress. And remember, IN Accountancy is always here to help you make the most of your freelance journey. Start by downloading our Ultimate Guide to Freelancing here.
If you have any questions or need advice on your freelance finances, contact us today and see how we can help you succeed! ✨
