The beginner's guide to managing and making money when you go freelance

If you've recently become a freelancer, then allow us to help.

We've teamed up with Coconut – the current account for freelancers and self-employed people – to offer this complete guide to going freelance, managing money and surviving. From choosing a business name and registering with HMRC as self-employed to crafting professional-looking invoices and chasing payments without feeling rude or awkward – we've got it covered.

1. Set up as a sole trader

As we all know, a sole trader is someone who runs their own business as an individual and is self-employed. This is where you'll most likely begin your freelancing journey.

As a sole trader, you'll need to register for Self Assessment and file for a tax return every year. It's then your responsibility to keep records of your business's sales and expenses, send a Self Assessment tax return every year, and pay Income Tax on your profits and National Insurance. Use HMRC's calculator to help you budget for this.

2. Consider if you need to register for VAT

If your turnover is over £85,000, you must register for VAT. You can also register voluntarily if it suits, for example, if you sell to other VAT-registered businesses and want to reclaim that VAT.

3. Choose a name for your business

As a sole trader, you can either trade under your name, or you can pick another name for your business. There's no need to register your name. But you must include your name and business name (if you have one) on any official paperwork such as invoices or letters.

Bear in mind that as a sole trader you must not include 'limited', ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’. The name can't be offensive either or be the same as an existing trade mark.

4. Set up a business bank account

You don't need to have a separate bank account for your business, but we'd recommend it for an easier life. It'll undoubtedly make sorting your tax return less of a headache.

Of course, you can't open a business bank account unless you have a business name (see step one, two and three) and registered business address.

Rather than a high street bank, we recommend trying Coconut, which is a little different and goes the extra mile. It's a current account made especially for freelancers and the self-employed that also helps with estimating your tax and sorting expenses, saving you time and money.

So, for example, as you use your Coconut account, it estimates how much tax to save, and it'll automatically categorise your transactions as you spend, so you save as much money on your tax bill as possible.

5. Choose your freelance rates

You've registered as a sole trader, considered VAT, chosen a business name and set up a current business account like Coconut. Now it's time to establish your freelance rates. But what should your day rate be?

It will be totally specific to your skills and expertise, the area you're based, your competition and the type of clients you work with. In which case, do some research. Ask more established freelancer friends. Talk to agencies and find out the "going rate".

Or consider how much you want to earn. Use the Your Rate free tool to calculate your ideal freelance rate. There's also the helpful IT Jobs Watch that tracks and indexes the latest going rates for various tech professions.

6. Create invoices that mean business

Having professional-looking invoices won't guarantee that you'll get paid on time, but there'll certainly help. Coconut is adding invoicing to its service soon, so you'll be able to create invoices directly from your current account and track when they've been paid.

Make sure you mark each document as an "invoice", date it and include a unique ID number along with the company name and address of the business you're billing. Each invoice should also feature your company name (and logo, if you have one) plus your business address, contact information and bank details.

You should also include a clear description of what you're charging for, the total amount and whether VAT has been applied.

7. Set up a time-tracking system

You're a freelancer that charges by the hour. Which means you should track your time. Every single minute. Phone calls. Meetings. Travelling to meetings. Skype conversations. Emails. Everything.

We like Toggl for keeping time-tracking. It's $18 per user per month if billed yearly. And it generates fancy timesheets that you can happily put in front of clients to prove that you have carried out the work.

Just make sure you add detailed descriptions against each log, e.g. phone call with the marketing team to discuss progress on website design. Because clients will ask for proof of time spent.

8. Keep track of payments and put contingencies in place

Be prepared to chase the money. Because clients will often forget and need a little encouragement to settle their bills. Some might not pay until you chase.

Not getting paid on time is a serious problem for freelancers. A recent petition is calling on the UK Government to establish penalties against companies for systematic late payment of invoices – responding, no doubt, to the growing frustration amongst the self-employed.

What's worse is that in a recent survey, of those who had to "write off" invoices, the average amount a year was over £2,300.

Combat any cash flow issues by having a cash safety net to fall back on and introduce a system to track and chase payments each month. Don't be afraid to pick up the phone and ask when you're going to be paid.

What's more, with all new clients, request payment upfront – or a deposit – before any work begins. That way, you reassuringly cover your costs.

9. Once established, start pushing for more money

When you've got a year of freelancing under your belt and built a loyal bunch of repeat customers, it's time to start increasing your day rate with every new business enquiry. Test the water. See if an extra £20 deters someone from hiring you. You might be surprised.

In the future, you should also consider increasing rates with existing clients. It's only common sense when you think of inflation and rising business costs in the years ahead. Not to mention the additionals skills and experience you've acquired along the way.

But how do you charge more without losing those clients? Well, you need to establish a new pricing structure, i.e. an annual rate review, and then spread the risk by approaching one client at a time, either by sending a formal letter or email. The following template should act as a guide, but feel free to tweak:

Dear [CLIENT],

I hope you are well.

I'm writing to inform you that as of [ENTER DATE], the base hourly rate for my services will increase to £X. I've been resisting any change to my pricing structure for X years, but it's time I recognised my increased operating costs and, more importantly, the significant experience I have gained during that time with regard to [ENTER CREATIVE DISCIPLINE].

As a loyal and valued client, you are eligible for a 10% discount on this new rate for the first three months of the new financial year. The increased rate will then come into effect on 1st January 2019.

If you have any queries regarding this change then please do not hesitate to contact me. May I take this opportunity to thank you for your ongoing business. I look forward to working on some exciting and rewarding projects over the coming months.

Yours sincerely, X

10. Keep your overheads low

It's tempting to spend when you're making good money. Our advice is to pretend you're always skint and keep more cash in the bank than necessary.

Don't be lured by expensive office space (unless you can afford it and your business needs it). Avoid taking on debt. Don't buy things you don't need. Make life easy for yourself by keeping costs down. Because the less you have to spend, the less pressure to work and earn money.