The personal finance guide for self-employed workers
There are more people than ever before registering as self-employed and tackling the working world alone – 1 in 6 at last count.
While you might have your area of work mastered, your book keeping down to a fine art and your tax returns worked out – there are some less immediately pressing issues that you still need to spend time thinking about.
Top of this list is your personal finance. You’re not in a position to just collect and present payslips anymore – so what do you do instead? How do you handle all those things that payslips or your employer had covered before?
We’ll take you through the major financial considerations you’ll have as a self-employed worker.
- Get insured
Although you might have welcomed breaking out of the 9-5 grind and making the most of your time as the boss – your enjoyment will quickly become despair if you lose the ability to work and cannot provide the financial support you need.
When you work for an employer you’re surrounded by a lot of things that stop you suffering if you can’t work – sick pay, phased return schemes and even health and safety law – but now you’re in charge of those things, and there’s little you’re going to be able to do if you just can’t bring the money in.
Fortunately, there are a variety of insurance products that are available for self-employed workers, each covering slightly different circumstances.
- Income protection
An income protection scheme is tailored around your role and your level of earning. If you are unable to work through illness or injury this type of policy will pay out a regular amount of money that will keep you, your personal life and your business afloat.
Just because you’re self-employed it doesn’t mean that your costs drop off if you’re not working, there are plenty of payments that are likely to need keeping up with – including car or van lease, finance costs, professional accreditations, start-up loans – and much more. Income protection means you can recover properly before getting working again.
- Critical illness cover
If you’re diagnosed with a critical illness while self-employed a policy of this type will pay you a lump sum – allowing you to handle business for a prolonged period of time while you recuperate.
Critical illness is unlikely to cover for smaller injuries and illnesses though – so make sure you’re covered for all eventualities.
- Life insurance
Clearly, no one anticipates needing life cover when being self-employed – but it’s these unexpected and unlikely occurrences that life insurance is there for.
If you have a family and significant financial commitments, having cover in place in case of the worst is really important – as it can let loved ones cope with your illness or passing without the additional stress and upset of dealing with increased financial burdens.
- Get a pension – and cover your state pension
A good pension scheme is a major benefit of working for an employer but when you become self-employed the responsibility is all yours when it comes to thinking about the future.
Self-employed workers can choose between three different types of pension:
- Stakeholder pensions
- Personal pensions
- Self-invested personal pensions
The type that’s right for you depends on your personal circumstances and how you will organise your business going forward – so it’s worth talking to an accredited pensions advisor about finding the right type for you.
Whichever kind you choose, it’s worth working in a way that resembles that of an employed worker – i.e. paying in an amount each month that you can budget for with your normal book keeping and financial management. That doesn’t mean that you can’t top up further down the line though – being self-employed gives you some flexibility if your income is less predictable.
It’s important not to forget about your state pension as a self-employed worker too. You’re still expected to pay your National Insurance contributions (NICs) – and must have done so for 35 years to benefit from the relatively new flat-rate state pension.
Employees pay ‘Class 1’ contributions – whereas self-employed workers pay a fixed amount of ‘Class 2’ contributions along with ‘Class 4’ contributions – which are based on profits. Both need to be kept up – but all add up to the same level of pension contribution. If you ever find yourself falling short – you can always top up.
You can pay up to £40,000 into a pension annually – and the lifetime limit is £1m. The HMRC’s “carry forward rule” also means that you can use the past 3 year’s contribution limits too – which is especially useful if funds have been tight as getting your self-employed business of the ground began.
- Finding a mortgage
It used to be that mortgages for self-employed people were very hard to come by – lenders often considered self-employed workers a less attractive and less reliable prospect for repayment, meaning that when mortgages were available, they were often at increased cost.
Then, the advent of self-certification mortgages saw this turn around – mortgages for people who were not traditionally employed were given on an ‘affordability’ basis – meaning that if you could demonstrate the means to pay – you could get a mortgage. It wasn’t long before this was seen as irresponsible lending though, and after the financial crash of 2008, self-certification mortgages were banned.
Fast forward to 2017 and lenders are becoming more comfortable offering mortgages to the self-employed – and since there’s been such an increase in numbers, self-employed people are now seen as a legitimate area of the market – and not just an exception from the norm.
If you’re hoping to secure a mortgage, there are some basics you’ll want to cover – having a minimum of 1 years filed accounts is important, with 2-3 being even more ideal. What’s more, mortgage providers are concentrating more on your field of work – rather than your employer, so if you’re working in the same industry – just with a different approach to how you’re paid – you stand a better chance of hitting the eligibility criteria.