The number of people running their own businesses has soared in recent years. Self-employment offers increased flexibility – with the opportunity to map out your own work destiny and plot a better work-life balance. But it’s important not to neglect your personal finances in the process.
If you’re already self-employed, the list below will hopefully serve as a reminder of the aspects of your financial planning that need to be considered.
1) Set up an emergency fund
Having a safety net is one of the first rules of financial planning. Your first step should be to build up an emergency pot of cash that you can fall back on should you lose your job, see your income cut or face any unexpected costs. The coronavirus pandemic is a great example of this.
Your ‘emergency fund’ should have around twelve months’ worth of expenditure and should be easily accessible with no lock-in periods.
2) Tax & HMRC
You are responsible for paying tax and National Insurance on your income, these won’t be deducted from your employment income automatically. Good record keeping is essential to work out how much you will need to pay. Once you know this, you should keep funds aside for your expected and upcoming tax bills.
You need to tell HMRC as soon as you become self-employed. The latest you can register with HMRC is by 5 October after the end of the tax year during which you became self-employed.
You will receive a state pension as a self-employed person. You need to have ten qualifying years on your National Insurance record to get any State Pension and 35 qualifying years to receive a full State Pension.
3) Get pension savvy
If you’re self-employed you don’t get the benefit of auto enrolment and employer pension contributions. You’ll need to consider your own pension arrangements to avoid neglecting this key part of your financial planning.
When you pay into your pension, you’ll receive basic-rate tax relief from the government.
So, if you pay in £800, the government add £200. If you are a higher rate or additional rate taxpayer, then you can claim back even more tax relief on your self-assessment. Self-employed individuals are subject to the same annual allowance limits.
Options include stakeholder pensions, which are simple and have capped charges. Alternatively, you could go for a self-invested personal pension, with wider investment choice.
4) Peace of mind
An important consideration is, what would happen if you became seriously ill, disabled, or unable to work. You may wish to consider income protection; this covers you if you become ill or are unable to work due to an injury. You could receive a pay-out between 50% and 60% of your average income each month.
Also ensure your Will is up to date. This is the only way to make sure your property, possessions, and investments (known as your estate) go to the people and causes you care about.
5) Build a picture of your current and future finances
Financial planning is all about anticipating the consequences of different choices and situations. By looking at your income, outgoings, savings, and other assets, you can crunch the numbers to create a long-term projection of your finances. Identifying trends (positive or negative) can help to give you the best chance of achieving your goals and have a huge impact on how in control of your finances you are.
We’ve designed our free online health check to help you measure your financial fitness, and to see what your finances might look like in the future.
If you do not have a plan for your future finances or would like some advice on your existing plan, please get in touch.
