Friday 24th May 2024

Thinking of going freelance? These are the key financial considerations


Ditching your job and setting up our own businesses is the ultimate dream for many of us.

But, while ditching the morning commute might seem attractive, being your own boss is no walk in the park.

Going it alone requires an enormous amount of planning and organisation and, arguably, you need to be even better at managing your finances.

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Below are some must-dos if you take the plunge and decide to join the ranks of the UK’s 4.8 million self-employed.

Pay your tax

One of the perks of being employed is that you don’t have to fill out a dreaded self-assessment tax return each year. Thankfully, your employee calculates how much you owe and automatically deducts it from your pay each month.

But if you decide to go it alone, it becomes your responsibility to make sure you’re paying the right amount of tax and national insurance.

That means working out how much you owe and paying it by the 31 January deadline each year.

To do that you need to ensure you have the cash to cover your tax bill. The best way is to set some money aside in an easy access account each month.

But how are you meant to know how much to save each month? HMRC (HM Revenue and Customs) has a useful tool to estimate how much tax and national insurance you are likely to owe, based on how much profit you make.

However, remember that if your profits rise, so too will your tax bill, so make sure you save more.

Thinking both long-term and short-term

Even the most successful self-employed workers worry about the business suddenly drying up from time to time.

Therefore, it’s important to build up a healthy savings pot that will see you through those lean times.

As a rule of thumb, aim to build up the equivalent of at least three – and preferably six – months’ earnings. That way, your standard of living won’t drop off if the orders do.

However, you also need to think long-term – and that means setting aside some money each month for retirement.

As with all workers, the earlier you start the better. In fact, self-employed workers need to save more each month than someone who is employed as they don’t get a monthly pension top-up from their employer.

Many self-employed people save into a Self-invested Personal Pension, or Sipp, as it is known for short.

Essentially, these are personal pensions that allow you to make your own investment decisions.

When you pay into a Personal Pension that has been registered with HMRC, the Government will automatically top up your pot by 20%. Higher rate taxpayers are eligible to claim back a further 20% or 25% (for additional rate taxpayer) from the taxman – so make sure you fill in the pension element of your self-assessment tax return to qualify for the tax relief.

Protect your income and your family

While at times you might feel invincible, you may occasionally be unable to work because of illness or injury.

As a self-employed worker, you’re not entitled to statutory sick pay if you’re ill. However, you may qualify for Employment and Support Allowance.

But this is works out a maximum of just £111 a week, so it pays to have a back-up option.

Therefore, you should consider taking out an income protection policy. This will pay anything between 50% and 100% of your earnings if you are unable to work because of illness or injury.

And they are relatively cheap – cover can be purchased for as little as 44p a day, according to Wage Protect.

There’s a lot to think about there – and if you’re still intending to go self-employed after thinking about all the financial ramifications, good luck!

If you want to learn more about how evestor offers help with savings and investments, please visit: http://www.evestor.co.uk/.

Hayley Millhouse

Head of advisory services for Open Money, Hayley champions making advice affordable and accessible for everyone.

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