Moving to a freelance-based role can give you huge financial freedom and great earning potential, and forward financial planning is the key to success.
In our recent Move the Needle webinar for our Obelisk Support community, Lucinda Acland, Obelisk’s L&D Partner spoke to Molly O’Donnell, Chartered Adviser at Fortress Wealth Partnership, who works with lawyers who are thinking of or who have moved into a consultancy role, about financial wellbeing and planning.
#1 Be clear about the differences between freelance and employed roles
There are many benefits to becoming a freelance lawyer – more control over your work and independence means you can control your working hours. The key to success is to make sure you know how much you need to work to meet your financial needs. Molly highlights the obvious difference of freelancers not being paid via PAYE, whereby national insurance and tax will have been deducted automatically. In addition, there will no longer be employee benefits, such as pension, life insurance, critical illness cover, so it’s important to know if you need these in place.
She emphasises the need to build up an emergency fund of at least six months’ expenditure. This will cover any unexpected emergencies but also give you a buffer if you are out of work and the financial peace of mind whilst you wait for the right role. Molly suggests that if you have children, a mortgage, or higher financial obligations, then a nine- or 12-months’ buffer will provide greater security.
A good place to start when it comes to budgeting and saving, is to consider your direct debit obligations and work out the annual payments over the course of the year. If you don’t think that this expenditure is worth your money, when looked at as an annual figure, it will make reducing your expenditure easier. However, Molly emphasises your budget forecasting should be realistic and using cash flow modelling tools can help you with this.
“Put in place a budget and make sure this includes your financial protection, tax and pensions.”
#2 Payment considerations as a freelancer
With the introduction of the HMRC regulations known as IR35 in 2021, many freelance roles require consultants to work through the entity of an umbrella company, which administers the tax deductions on behalf of freelancers. Whether IR35 applies depends on the client role requirements. The client confirms whether the role is to be considered inside or outside the IR35 regulations. If the role is inside IR35 the consultant will have to contract for their services via an umbrella company. If the role is outside IR35, consultants have the option to either contract via their own personal services company or an umbrella company.
You will pay tax following your tax return, which is twice a year – not monthly – so make sure you save as you go so that you don’t get caught out with an unexpected tax bill later down the line and don’t have the funds to cover it.
Therefore, you need to consider how much you need to earn to make the ‘salary’ that you would like (including deduction of tax), having worked this out based on your fixed expenditure.
Molly advises once you have worked out your required expenditure, to ‘pay yourself first’ and put this fund in a separate account to your general current account and be guided by the best interest rate available, subject to being able to get access to it as necessary.
#3 Pensions past and present
Freelancers do not benefit from employee auto-enrolment schemes and as emphasised above it’s vital to allocate enough funds to continue to build up your pension fund. Consider your retirement goal amount and then work ‘backwards’ to see how much you need to save to achieve this. Again, cash flow modelling tools can help you visualise your future position and any potential shortfalls that you will need to prepare for.
Molly reminds us that it’s important to review any legacy pensions you may have paid into and to make sure you know where they are. “It is estimated that there is £19.4 billion worth of lost pensions as people have moved jobs – make sure you keep track of your pensions from previous employment.”, says Molly.
Further, you should be aware of the different pension allowances as these differ from a limited company to an individual. And to avoid being caught out with a tax bill as there is a tapered annual allowance; whereby the amount you can put into your pension reduces the more you earn.
#4 Insuring for peace of mind
Financially protecting yourself becomes more important when you embark on a freelance career and the most common products available are:
- Life insurance – designed to pay out a lump sum if you die and can be used to pay off debts and provide support for any family.
- Critical illness cover – pays out a lump sum to support you financially if you are diagnosed with a critical illness (as prescribed on a pre-defined list of between 30-50 conditions)
- Income protection plans – pays out a regular amount (60% of your income) if you can’t work due to illness.
These can be arranged privately either using an adviser or by yourself but ensure the policies give you the cover you want. As they will be paid as a monthly premium they need to be factored in to your expenditure.
An important aside is to consider your end-of-life arrangements, not a cheery prospect but if you have dependents its vital that proper provision is made for them through making a will, appointing guardians if you have children and creating power of attorneys in the event of loss of mental capacity, for whatever reason, as these are also important for any financial planning in any event.
Find out more
Watch the full interview for more information here on the Obelisk Support YouTube channel, it’s never too soon to start financial planning!
Note: this article and video are intended as a general overview for guidance only and do not take the place of personalised financial advice.