The freelance financial challenges you can face are often surprising to many newcomers in the self-employed field. Some can also be a wake-up call, as you can face a lot of extra admin work. From the stress of variable income to increased expenses, here are some examples.
Reduced Access to Financial Products
Lenders typically assess clients based on income and financial stability, which can be variable when you are a self-employed freelancer. Unless you have a steady income from a specific client, such as a partnership with a copywriting company, for example, income can be all over the place. Lenders don’t like this, and it can be a good idea to seek independent mortgage and insurance advice as a self-employed freelancer when you have irregular income streams.
Freelancer Financial Challenges with Variable Income
The variable income from freelancing not only affects your ability to obtain products such as mortgages, but can extend into other parts of your life. The fluctuating nature of freelance income can bring some serious challenges and make everyday life more unpredictable:
- It can be stressful not knowing if work will be steady from one month to the next.
- This requires excessive planning and cutting back on the things others enjoy.
- You may also need to create an emergency fund and a savings buffer for costs.
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Late and Non-Payment for Services
Businesses benefit from various insurance and financial products that can protect them from late or non-payment, but you may not have access to these as a self-employed freelancer. Additionally, you enjoy being paid for your work when you are employed by a business. As a freelancer, you have no such luxury. Because of this, you can spend just as much time chasing payment as you do actually working, leading to stress and inefficient use of your time.
Freelancer Financial Challenges of Self-Employment
In the UK, around 33% of self-employed freelancers struggle when it comes to taxes, making financial management much harder than it needs to be. You can reduce your self-employment tax bill with some tips and tricks, but the fact remains that there are other financial challenges:
- You have no access to sick pay, so your income is zero when you are ill.
- You also have to plan your finances well in advance if you want to take a vacation.
- There is no access to employer-based benefits such as workplace pension schemes.
It can be much harder to manage yourself as a freelancer. When you are working for a company, things like taking a vacation are pretty trivial. However, being self-employed means you must plan far ahead to cover the costs, since if you don’t work, you don’t get paid.
Different Tax Obligations and Planning
As self-employed workers, you are responsible for your taxes as you don’t have the benefit of tax payment systems such as the UK’s PAYE scheme. As such, you are responsible for tax returns that are highly accurate and for ensuring taxes owed are paid on time. This can put greater stress on you as a freelancer, as the bill can be large if you leave it. However, if you are in the UK, you do have the option to pay your tax bill monthly, which can ease the burden a little.
Expense-Related Freelancer Financial Challenges
Because you are the business and the owner at the same time, you must also pay for everything you need to freelance. This includes pretty expensive overheads that are usually covered by an employer when you work for a company, such as the following expenses:
- You can’t request fuel reimbursement when travelling, but you can deduct it from tax.
- You might have to pay for expensive equipment, such as computers, to do your job.
- Subscriptions to software and apps are a necessity for most online jobs today.
Harder Retirement Planning
One of the greatest benefits of working for an employer is the access you have to workplace schemes such as employer pension contributions. However, self-employed retirement planning is much more important than when you are employed because there is no access to such schemes as a freelancer. Because of this, it is vital that you open a long-term savings account to take advantage of compounding interest. It is also recommended that you join a private pension scheme such as Pension Bee to begin saving for your eventual retirement.
Summary
You can face reduced access to financial products such as mortgages, which is one of the biggest financial challenges freelancers face. There are also no workplace benefits, such as sick or holiday pay, and no access to workplace pensions, which puts a strain on retirement.