How much money should I set aside for my tax bill?

If you have been freelancing for a while, and have started making money, you might want to consider putting some of your income aside to pay your personal tax bill. Being prepared will make your life much more comfortable, and will also lessen the blow when you work out what tax you need to pay to HMRC.

Do Things Monthly

The most manageable way of saving for your tax bill is to set aside a certain amount each month. In theory, this is what you would be doing if you were employed, so it makes sense to do it as a freelancer.

Being self-employed can be very hectic, but on the other hand, you may find yourself twiddling your thumbs, wondering where the next lot of work will be coming from. You can’t guarantee your income as a freelancer, but this also means that you should be prepared to pay any reasonable amount of tax. One month may be very slow, but the next could be a big earner.

The amount of tax you pay is dependant on your annual income, so although you may not think you will owe much, once you have worked everything out, you may notice that you have earned more than you initially thought. Always be prepared.

How Much Should I Save?

Saving 30% of your income is the best idea. Why? Basic rate tax accounts for 20%, and National Insurance is 9%. Saving a little bit more allows for extra expenses and rainy days. Using this method works for many freelancers, and you may find that you have money to spare once your bills are paid. Whether you use the extra money for next year’s bill, or you treat yourself to a holiday, it’s money that will always come in handy!

The 30% Rule Is Not For Everyone

If your income isn’t that high, then you won’t be paying as much tax as a higher earner. Let’s say you earn £1,000 each month. Your salary is £12,000, which is within the personal tax allowance, and you will, therefore, only be required to contribute to your National Insurance. There would be no point in saving thousands of pounds, for a bill that will equate to around £500. Although it’s a good way of saving, it’s probably not worth 12 months of financial struggle.

Having more than one source of income will affect what tax you pay, especially if you go into the higher tax threshold of £50,000. Saving 30% of your lower income will not work, because each income will be taxed at 40%, whether it’s £12,000 or £4,000. If you are earning this amount of money, then you would be better off setting up a limited company rather than being a self-employed freelancer.

Tax doesn’t have to be taxing, and having the right accountant can really ease the burden. Get in touch today to see what we can do for you.