Tips for managing fluctuating income as a contractor

There are many benefits to being a contractor, from setting your own hours to getting to keep everything you make (notwithstanding the Tax Man), but one of the biggest challenges is effectively managing an inconsistent income.

As an employee, you can budget more easily because you know you’ll be receiving the same amount of money every single month, but as a freelancer or contractor, this can fluctuate from month-to-month as clients come and go, and fixed projects end.

In this blog, we’re going to look at some tips for better managing your finances when you’re self-employed.

1. Save up a ‘freelance fund’ before getting started

If you’re still only thinking about going self-employed but you haven’t made the leap yet, it’s worth saving up a buffer first. This will be particularly valuable when you first start and you’re trying to build up a customer base, but it’ll also be something you can rely on if you experience some leaner months.

How much money you save is really your choice, but of course the larger your freelance fund the more you’ll be protected from quiet periods.

2. Go self-employed part-time first

As long as it doesn’t conflict with your employment contract, searching for one or two freelance clients before you take the plunge full-time is a great way to set yourself up for success.

This might mean you have to work in the evenings or at weekends while you juggle a job and your clients, but the benefit is that when you finally do go self-employed full-time you won’t be starting from scratch. What’s more, the freelance income you do earn during this time can all go towards your freelance fund.

3. Create a comprehensive budget

Budgeting as a contractor is difficult because you don’t necessarily know how much you’ll earn during a year, quarter or even a given month—but this is why it’s even more important to create a budget plan for yourself.

Sit down and figure out all of your outgoings for the year, including how much you’d expect to spend on socialising, gifts and any other discretionary spending. That figure will help you to understand the minimum amount that you need to earn, but remember, you’re going to have to put money aside for your tax bill too.

4. Don’t splash the cash just because you have a good period

If you have a great earnings month avoid the temptation to spend money like you’re going to be earning that amount all the time. 

You’re going to have great months as a contractor, but you’re going to have poor ones too. The key is to make sure they balance out, and this is going to be made a lot harder if you’re not disciplined when times are good.

After a couple of years as a freelancer you’re going to have a better idea of what you can expect in terms of earnings, which will make it easier to judge what you can spend and when, but we recommend practicing frugality when you’ve just started out.

5. Understand when you need to pay your tax bill

 A benefit of being employed is that you don’t have to worry about figuring out how much tax you owe—it’s simply taken from your pay before you receive it.

However, once you’re self-employed the burden of paying your tax falls entirely to you—and it’s critical to know when you’re going to have to pay it.

First thing’s first, you’ll need to register with HMRC for self-assessment by 5th October if you’ll be due to submit a tax return in the following January. 

For contractor’s the tax year runs from 6th April until 5th April the following year which means that if you, for example, earned any money as a freelancer between 6th April 2023 and 5th April 2024, you’ll have had to register for self assessment by 5th October 2024 and submit your tax return by 31st January 2025.

If you completed a self-assessment return last year, you don’t need to register again this year.

6. Engage an accountant and focus on what you do best

Unless you’re going self-employed as a financial advisor, the chances are you’re not an expert in accountancy or the tax system. The complexity of managing your own finances varies depending on the type of services you offer, as well as the structure of your company, but the more time you spend with your head buried in budgeting spreadsheets and trying to understand your tax burden, the less time you’re spending doing what you do best for your clients.

With this in mind, it’s always worth working with an experienced sole trader or small business accountants. Here at Warr & Co we specialise in providing services to sole traders and contractors, as well as limited companies set up by contractors for offering their services.

To find out more, request a free consultation today. We’ll take a look at your current situation and advise on how best we could help.