Profit First for UK freelancers - header image of pots containing fans of 20 pound notes

Hate maths? Love holidays? Read on

As the Christmas decorations went up, so did my dread. I’d tried to be good about setting aside tax for the January HMRC deadline, truly. But, once again, I was raiding my personal savings to make up the difference. Why couldn’t I be more organised. Why?

Hello. My name’s Helen and I was a business finance phobic. After five years as a freelancer, finance continued to be my Achilles heel. It brought back all the bewilderment of Maths class, a subject I ditched as soon as possible.

Fortunately there is a better way. I now recommend using Profit First for UK freelancers. It’s a free and simple financial strategy which has transformed how I run my copywriting business.

What sort of UK freelancer or business suits Profit First?

Profit First is the financial system for those who don’t understand finance. Ever feel like you’re working incredibly hard but have nothing to show for it? Do you scramble around when it comes to paying the tax bills? Only have a vague grasp of how much it costs to run your business? Then this is the financial system for you.

The Profit First principle in a nutshell

When your invoice is paid, instead of keeping it in one account, you divide it up into different areas. You then pay yourself a profit first, hence the name.

The logically-minded may scoff, but the system is based on behavioural science and, more specifically, Parkinson’s Law which states:

“Work expands so as to fill the time available for its completion.” – C. Northcote Parkinson

It’s why if our deadline is in ten days’ time, we’ll take ten days to do it. It also applies to our relationship to scarcity and plenty. Creator Mike Michalowicz talks about how careless we are with a full tube of toothpaste compared to how we squeeze out every last drop by the end.

When we see a zero balance in our business account, it makes us more frugal about running our business. The truth is we don’t have zero. We’ve squirreled away money so we can still pay our bills and our wages. But if it’s not obvious, our brain acts like we don’t have as much.

I heartily recommend buying the book Profit First by Mike Michalowicz for the full story. It’s a pacey, honest read, a useful reference source and entrepreneur Mike is great company.

The Profit First bank accounts you (theoretically) need

Mike recommends setting up five separate accounts, plus two optional ones:

  1. Income – the business bank account where the money comes in
  2. Profit
  3. Owner’s Compensation – as in your wage
  4. Tax
  5. Operating Expenses – such as printer ink, insurance and subscriptions
  6. Tax Vault (optional)
  7. Profit Vault (optional)

In the end, I only had to set up two new bank accounts, plus a savings accounts for 6. Tax Vault. Here’s the why and how.

Profit First and UK bank accounts – my workaround

In America, it may be that you don’t incur bank charges for accounts. But it’s not so simple in the UK, especially for business banking.

However I stumbled across an easy workaround.

Dealing with 1 to 4

The 1. Income account is obviously the Business Account, into which your invoices are paid. But, within it, I set up ‘pots’ for 2. Profit, 3. Owner’s Compensation, 4. Tax and 5. Operating Expenses.

But of course a savings pot of 5. Operating Expenses wouldn’t work when it came to paying by Direct Debit or online expenses. I needed another current account.

Solving 5. Operating Expenses

When you request a business account with an online bank like Monzo or Starling, they ask you to open a personal current account first. But I was more than happy with my existing one – codename Fort Knox for the sake of this article. Why did I need another account?

Then – light bulb moment! I realised this new personal current account – let’s call it Newbie Dosh – could be used as my business’s actual Operating Expenses account.

Profit First for UK Freelancers - diagram showing how income is assigned to different pots
Diagram: How Profit First pots work

A word about optional Tax Vaults and Profit Vaults

6. Tax Vault: It’s surprising how quickly tax racks up. Mike advises stashing it away every so often in a Tax Vault savings account. But in one which is awkward to access. Perhaps postal only or which penalises you for each withdrawal? That way you won’t be tempted to spend what is the government’s money, not yours.

7. Profit Vault: You can do this with Profit too if you’re saving for something significant.

How Profit First works in practice

My client pays their £1000 invoice into 1.Income – as in my Business Account.

I hive off the following to areas within Business Account:

  • 5% of the £1000 goes to my 2. Profit pot – so £50
  • 60% to 3. Owner’s Compensation pot – so £600
  • 25% to my 4. Tax/National Insurance pot – so £250
  • 10% to my 5. Opex – as in Operating Expenses – pot – so £100

This means I’ve cleared the plate of the main business account and the balance is £0. But that’s OK, as I have money to cover my business expenses and tax.

Every fortnight, or sooner depending on need / levels, I then:

  • Empty the Owner’s Compensation pot, sending it to my personal Fort Knox account
  • Empty the Opex pot, transferring it to the Newbie Dosh account

Here’s the diagram with figures:

Diagram showing how percentage splits work in reality
Diagram: Profit First for UK freelancers in action

Why these percentages work for me

5% Profit

This is admittedly high for Profit First. Mike recommends starting with 1%. I could have done this, and then taken 64% for Owner’s Compensation.

But weirdly because Profit is stored within my business account, I haven’t been tempted to raid it like I would a personal savings pot. Plus it’s hugely rewarding to be able to say Ink Gardener Copywriting sent me on holiday as a ‘bonus’.

60% Owner’s Compensation

Better known as my wages. However it’s easier to follow Profit First if you stick with Mike’s labels. If I change any of the other percentages, this is the area that takes the hammering / gets the bonus.

25% Tax/NI

I’m a UK basic rate tax payer so assumed this should be 20%. But I got caught out last year by not accounting for National Insurance Class 4 contributions. At the time of writing, these are a whopping 9% of any profits over £9,500 ish. Check out Self-employed National Insurance by for the current rate.

Also your Personal Allowance means it’s not exactly 20% for everything. Plus tax Payments on Account make it tricky to work out how much you need for HMRC.

What are Payments on Account? Once your profits exceed £1,000, HMRC will ask for advance payments of half your previous year’s tax bill in January and July . I’m convinced the July Payments on Account demand that comes out of the blue is why so many businesses fail in their first three years.

Hollies Bookkeeping suggests 30% might be a better figure to set aside for tax and National Insurance. I’m just desperate to protect my Profit pot.

10% Operating Expenses

This has been a real Goldilocks figure that I’ve tinkered with. 15% was too much. 7% too little. I think 10% is just about right. I’m a freelance copywriter, so I don’t have to buy stock. However I do pay for business insurance, subscriptions, website hosting, software and printer ink. And Pilot pens. Lots of Pilot pens…

As the Newbie Dosh account is a personal current account rather than a savings account, it can deal with Standing Orders and Direct Debits. I make sure its balance is always in the black, with enough to cover the two largest monthly pay-outs at any one time.

Within it, I’ve also set up other dedicated ‘pots’. Copywriting business coach extraordinaire Kate Toon introduced me to Profit First. And now there’s literally a pot with her name on, for my membership of her Clever Copywriting School. I also have ‘Accountant fees’ pot.

Newbie Dosh also refunds any expenses made by my personal Fort Knox account. For example when I pick up printer paper during the weekly shop.

Profit First and UK freelancers – which bank account should you use?

These banks offer business accounts where you can stash money in different areas:

Have I missed yours off the list? Please email me at helen [at] or tweet me at @inkgardener and I’ll add it on.

Frequently asked questions

Here are a few questions that have come up when I’ve explained Profit First for UK freelancers in the past.

I’m not sure. It still sounds complicated. Is it difficult to do?

Not at all! Honestly, percentages are a doddle to work out. I swear it only takes five minutes a fortnight to put the money into their different pots. And the peace of mind it gives you is priceless. Use the online percentage calculator website if you’re really struggling with the Maths.

Can I change these percentages?

Absolutely. It’s up to you. Every business and business owner is different. The Profit First book gives more suggestions.

A real benefit of Profit First is that it acts as an early warning system for business viability. You can’t cheat the percentages. If adjustments still see you in the red, you’ll need to cut your expenses or pay yourself less.

Can I use set amounts rather than percentages?

You can, but then it’s not Profit First. It’s the percentages which are the game-changer. In a ‘feast’ month, you put more in. So when a ‘famine’ month comes along, you’re covered. Set amounts mean you’re not cutting your coat according to your cloth.

Can I move money between the pots?

Yes, although I only do it if there’s a significant surplus in Operating Expenses. Just don’t touch your Tax pot!

Does 1. Income deal with turnover or profit?

Turnover. Don’t know the difference? Check out my How to become a freelance copywriter article with lots tips for freelancers and start-ups.

I just can’t see the logic in the system.

Ah, the classic “Not so much a question, more of a statement.”

Fair enough. Profit First can be a bit Marmite and isn’t for everyone. If traditional book-keeping works for you, then by all means continue.

How did your accountant react?

To quote his email: “I am impressed!”

For Profit First, I just sent him the Excel spreadsheet versions of my 1. Income business account and Newbie Dosh. It was such a relief to get the accounts to him early. It meant my July Payments on Account demand was accurate and I knew exactly what to pay HMRC the following January.

There are Profit First accountants and book-keepers you can switch to if yours is allergic to it. But I can’t see why if you follow my workaround.

Want to find out more about Profit First for UK freelancers?

Here are some other UK businesses that are raving about it:

  • How I use The Profit First System to run my business – Hazel Whicher. This also includes her Payments on Account shock and how she solved it.
  • Best Bank for Profit First – Annette & Co.
  • A Profit First Success Story – Raffingers Accountants

Let me – and Mike – know how you get on

I wrote this article to spread the word about the awesomeness of Profit First for UK freelancers. If you’ve any questions or want to share your joy in implementing the system, please tag me @inkgardener and Mike – @MikeMichalowicz – into a tweet. I’m in no way affiliated to him, I just think it’s a cracking solution!

About the author

Helen Reynolds is a freelance copywriter with more than 20 years’ experience of writing websites. Helen presented her Maths teacher with her ‘My Horriblest Subject Is Maths’ poem on the final day of term. She now uses her ‘Favouritest’ subject of English to sow, transplant and refresh websites with customer and Google-friendly web content.

Based in York, Helen helps heritage, hospitality and business professionals across the UK. Find out more about her freelance copywriter services.