Being your own boss is becoming ever more popular, whether it’s freelancing, contracting or a shiny new start-up. But as you successfully build your empire, it’s important not to neglect your finances. Here’s what you need to know about looking after your own money matters if you’re self-employed:
1. Save in a pension
As a self-employed worker, you are solely responsible for your own pension provision. It’s important to remember that pension contributions benefit from initial tax relief. A contribution of £10,000 made by a basic rate taxpayer only costs £8,000 after income tax relief. For a higher-rate taxpayer, the net cost is just £6,000. Even if things are tight, it is better to save something rather than nothing. Don’t forget to review and increase contribution levels when you can.
2. Have a savings buffer
Preparing for a drop in income is prudent. This might mean keeping a substantial sum of money — perhaps the equivalent of three to six months of your earnings — in accessible cash savings should you need to cover your mortgage or other bills if a client is late paying a significant bill or work slows.
3. Budget
In the early days of building your business, revenues might be sporadic or erratic. Be prepared for this by working out the minimum income you need per year and writing a detailed budget. Saving as much as you can afford and sticking to the budget will help you through any rough patches.
4. Prepare for remortgage trouble
It can be more difficult for self-employed workers to get a mortgage in the early years as most lenders want to see two or three years of accounts. A broker can help you approach the more flexible lenders.
5. Get life cover
You might want to keep up a life policy if you had one previously as part of your employment package. The amount and type of life cover should be aligned with personal circumstances. Do you need cover to financially support a spouse, partner or child if you were to die or, for example, to pay off a mortgage or other debt?
6. Consider income protection and medical cover
Many self-employed workers could suffer financial hardship if they are off work due to illness or injury. Unlike their employed counterparts who are still likely to receive their salary if they’re unable to work, their income will cease. Consider an income protection policy, which pays an ongoing income until you can return to work. Just watch out for hidden exclusions when you choose a policy.
For medical cover, you can buy annual private medical insurance or you can choose a pay-as-you-go option where you buy private treatment as and when you need it. The cost of cover is rising because of an ageing population and the increasing availability of new — and often expensive — technologies and treatments. But you can get a specialist broker to help you find an affordable deal.
7. Buy professional insurance
You might need professional indemnity insurance which can ensure you are covered against claims made by clients for financial loss, or reputational damage due to negligent advice, design or services. A policy typically covers the legal costs for defending the claim as well as any compensation paid out. Public liability insurance, which covers both tradesman and professionals, might be worth considering too.
8. Don’t forget about general insurance
Talk to your insurance providers for home contents cover and car insurance to make sure the policies are amended to be “for business use”. Failing to declare to your insurer that you work from home could invalidate any claim.
9. Hire a tax accountant
You will need to file an annual tax return, and a quarterly VAT return if you become VAT registered. Accountants fees may be worth their weight in gold to take the pressure off you worrying about the numbers — and they are an allowable business expense and as such, tax deductible. Find an accountant at the Institute of Chartered Accountants in England and Wales (ICAEW) directory.
10. Write a realistic business plan
Last but not least, if you’re starting a new business venture, it pays to write a realistic business plan. Set out your sales targets and work out the cost of achieving them and other factors such as how much stock you need to hold. This will help you stay on top of your business and help you identify any issues before they turn into big problems.
