Essential financial record keeping tips for freelancers

There are some 1.9m freelancers in the UK and they make up about 46% of the solo self-employed population (4m). Although often supremely talented when it comes to their profession or trade, many freelancers are less accomplished at managing their finances and tax. You might be a freelancer or someone who is considering becoming one. Whatever your situation, here are some essential financial record-keeping tips for freelancers that could help you to better manage your finances and make your tax returns easier to complete.

What are your legal obligations as a freelancer?

Unless you operate your freelance business as a limited company, your legal obligations as a freelancer are the same as any other self-employed sole trader.

That means you must keep accurate financial records, detailing your income and expenses/costs, so that you can complete your annual Self Assessment tax return. You don’t have to submit those records with your Self Assessment tax return, but you’ll need them if (UK tax authority) HMRC asks to see proof of your income and expenses/costs.

You must keep your records for at least five years after the 31 January online submission deadline of the relevant tax year. So, for example, if you filed your 2022/23 tax return online by 31 January 2024, you must keep your records until at least 31 January 2029.

You also need to keep receipts (whether actual or scans/photo images) for things you buy for your business, as well as bank statements and if relevant, cheque book stubs and sales invoices from your suppliers. You must also retain copies of all invoices you send out to your clients, because HMRC can also ask to see these.

Did you know?

When the term “freelance” was first used in the early 1800s, it referred to mediaeval mercenaries who would fight for whichever noble or country paid them the most.

How to keep your freelance records

There are no HMRC requirements on keeping financial records as a freelancer or any other self-employed worker. You can keep paper financial records, although very few people do this, because it takes more effort and time, while mistakes are easier to make and harder to correct. And it will save you less time when completing your Self Assessment tax return.

While some create their own digital spreadsheets to maintain their freelance financial records, for very good reasons, others use accounting software. Obviously, you’ll need to pay a subscription, but accounting software offers numerous time- and money-saving features, for example, monthly, quarterly or end-of-year totals are automatically generated. Costs can be easily categorised, so you can assess your spending, which can more easily be compared with your income, so that you can better understand and manage your cash flow.

Accounting software can also tell you how your freelance business is performing. Often it comes with a free invoicing facility and it can be linked to Self Assessment filing software, saving you lots of time and hassle when completing your Self Assessment tax returns. Popular accounting software also comes in app form, so you can access it via your mobile device, wherever you are, with your financial information safely and securely stored online, so it can easily be shared with others. 

Need to know! HMRC can charge you a penalty if your freelance financial records are not accurate, complete and readable.

Five financial record keeping tips for freelancers

1. Get a reliable system in place

Don’t go for a paper-based system. Invest in a small-business accounting software solution, then much of the hard work will have been done for you, because it will all be set up and set out as necessary. Customise it to your specific needs. Take time to find out how to use it and seek support if necessary. 

2. Update your figures regularly

Setting aside time every week, fortnight or month (don’t leave it any longer) to update the figures in your accounting software is advised. Adopting a “little and often” approach will prevent updating your accounts from becoming a much bigger challenge that you dread and avoid. You’ll also be able to keep a closer eye on the financial health of your freelance business and be better placed to manage your cash flow.

3. Remember one thing: accuracy is critical

Take your time and be methodical when entering your figures, because any mistakes now could have bigger consequences later. For example, your tax bill might be higher or lower than it should be (the latter could get you into trouble with HMRC). And inaccurate figures in your financial records will give you an inaccurate idea of your freelance business’s performance, financial health and cash flow. 

4. Tightly manage your expenses

Failure to manage your expenses properly can soon turn your finances into a mess, one that wastes your valuable time when you need to complete your Self Assessment tax return. Get into the habit of regularly entering all of your business expenses into whichever record-keeping system you use. Your expenses/costs should be categorised and accurately entered. Retain all invoices and receipts for your freelance expenses, because HMRC can ask for proof.

5. Make full use of software and apps

Minimise how much time and effort you put into financial record keeping by using software and apps to their full potential. This is not just limited to bookkeeping and Self Assessment tax return filing software, for example, there are many “expense-tracker” apps that you can use to snap, catergorise and store expense receipts. Usually they are or can be integrated with accounting software, making the whole process even more efficient, giving you more time to get on with other things.

GoSimpleTax is award-winning software that offers you an easier way to complete and file your Self Assessment tax return. And to ensure that your tax return is error-free and that you’re claiming all of your allowable expenses, why not get your Self Assessment tax return checked by one of our experts?

Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.