Being self-employed offers numerous benefits, but it also requires diligent financial planning to ensure stability and success. Without the financial safety nets of traditional employment, it’s crucial to take control of your finances.
Here are five considerations when developing your financial plan.
1) Define your financial goals
Effective financial planning starts with setting clear and attainable financial goals. Consider short-term objectives like managing taxes and long-term goals such as retirement planning. Having well-defined financial goals provides direction for your financial decisions.
2) The importance of a safety net
As a business owner, you have a responsibility to make sure that if disaster strikes, you’re leaving those you leave behind with security and stability. There is no Statutory Sick Pay for the self-employed, which may mean a reduction or halt to your regular income. Have you considered the impact of this?
As a director of a limited company, you can take life insurance out through the company. Like pension contributions, this will be an allowable expense, which will reduce your corporation tax liability.
You should also consider protection for the other key people in your business. Key person insurance protects businesses against the loss of profits if an employee becomes terminally or critically ill, or dies. The money can be used to find a replacement. Key person insurance can help keep the business trading.
3) Make the most of pensions
You may think of your company as your retirement plan, but this can be very risky because as you know, owning a business can be unpredictable. As a business owner you do not benefit from a workplace pension. However, as a business owner there are still very generous tax benefits available if you contribute to a pension which will help you build a secure future.
As an example, if you were to take £100 out of the business as a higher rate taxpayer, you would receive just £54 after corporation tax and dividend tax. If you contributed that £100 into a pension, the full £100 would be applied to the pension.
Furthermore, if you have been employed before it’s likely you will have company pensions through your previous employers, and it is worth reviewing and potentially consolidating these plans to keep things simple and to make sure they are invested in line with your goals.
4) Investing
Where do I invest my money? Will I lose it all? What products do I use? These are questions we hear all the time and understandably so, investing money can be very confusing. At EQ Investors (EQ) we invest your money for you based on factors such as your goals, your attitude to investment risk, sustainability preference & how long you’re investing for.
5) Plan your exit
If you want to sell your business in the future, you may have a sale value in mind, but will this number meet your income needs for the rest of your life? Or vice versa, you may have a retirement income figure in mind, but you may not be sure how much you need to fund that retirement income figure. Alternatively, you will be so busy with running the business you haven’t considered this at all.
I appreciate that planning for years from now may not be top of your priorities as you work hard to build your business, and this is where a good financial adviser can help you. A financial adviser can help you understand and establish your goals, make plans to meet your goals and then help keep the plan on track as time goes on, giving you more time to concentrate on the things you enjoy.
Speak with an EQ planner now
If you have questions about how to plan for your future using your business, please get in touch.
Please remember, pension and tax rules depend on your circumstances and may change in future.
