How I save for tax

As a freelancer, there are a few approaches to saving for the beloved tax bill:

1. Save 30% of each invoice in a separate account
2. Watch your account and try not to spend it all
3. Hope for the best

When I started freelancing, I was paranoid about under-saving for tax. I didn’t trust myself to be strict enough about saving a third of each invoice. 

I developed another system for managing tax savings. I use it to this day.

Regular saving

At the beginning of each financial year, I work out what I think I’m going to earn. I round this up a bit to give me some wriggle room.

I put this figure into the MoneySavingExpert.com tax calculator and divide the total by 52 (the number of weeks in the year). 

I’ve then setup a standing order that transfers this figure to a specific tax saving account every week.

This might seem convoluted, but it’s always worked for me. A nice feature of the calculator is that it includes student loan contributions, so you won’t be caught out by that, either.

This is a good time to point out that this isn’t financial advice. It relies on the MoneySavingExpert.com calculator being accurate, and you entering the correct sums/checking the right boxes.

It’s always worth double-checking these figures to make sure you’re saving enough – I’m not responsible if you don’t!

Why not just save on every invoice?

I can see the attraction of saving on every invoice. It’s transparent, straightforward and easy to keep track of. But it wasn’t working for me.

There are several things I like about this weekly method:

Painless saving

Because the figure is divided across the year, there are no big numbers suddenly disappearing into your tax account.

Set and forget, or change

If you notice any trends in your income, it can be something that you set at the beginning of the year and forget about.

You’re in control

Because it’s a standing order, you’re in complete control. If your circumstances change, you can increase/reduce the payments as you need.

Over-saving

This method has led to me consistently over-save. Despite knowing that I’ve overestimated my tax bill, I’m used to seeing a regular figure disappear from my account and have adjusted my spending accordingly.

When I first noticed this, it was pretty tempting to give myself a Christmas bonus. But I decided to setup a pension instead.

This started at a very low level, but I’ve increased it significantly over the past few years. The standing order I have setup now includes saving for my tax bill and a pension, so that I don’t need to worry about either of them.

If you find you’ve still over-saved, which I often have, this separate account can act as an emergency pot. But be careful! Only use this if you’re desperate and limit yourself to the surplus funds.

Things to watch out for

The main downside of this approach is that your calculations and estimations must be reasonably accurate.

If you’re in your first year or two of freelancing, you may need to adjust the figures a few times in the year, particularly if your income suddenly goes up. 

You have to commit to weekly savings. If you start skipping weeks, you could find that you’ve not saved enough.

This can feel difficult in lean periods, but I view the standing order as an unavoidable weekly bill or cost of running the business. If the work dries up for a significant period, there’s a strong chance you’ll have over-saved and can use some of that cash if you need to.

Other things to bear in mind:

1. This doesn’t take into account any PAYE earnings. Even if you’re paying tax on that, you’ll need to factor in the initial ‘tax-fee’ amount of that.
2. If you’re in your first or second year of freelancing, don’t forget about payments on account. If you start this from day one, you’ll already be covered, but you’ll need to consider this if you start saving late.

Which is right for you?

Despite those considerations, I still choose this method of saving. It requires more initial planning and some occasional management to check things are on-track but, for me, the benefits are worth it.

I rarely think about my tax bill now and I’m never worried about having enough cash to cover it. I also love that it helped me to start a pension and that’s something I probably wouldn’t have found the money for if I hadn’t started saving in this way.

You might prefer the simplicity of saving a third of each invoice, but if you find this problematic or want to try an alternative approach, I’d recommend giving this one a go.