The number of self-employed people in the UK has risen sharply in the last 20 years. According to the Office for National Statistics, there are now just under five million self-employed workers in this country, up from just 3.3 million in 2001.
Jordan Marshall, Policy Development Manager at the Association of Independent Professionals and the Self-Employed, said: “Being self-employed allows young people, in particular, to work on the projects they are truly passionate about, when and where they want.
“Technology has made this all so much easier, whether finding work through online platforms or even being a ‘digital nomad’ – travelling the world while doing remote freelance work.”
While there are many advantages to working for yourself, owning your own business can present a range of different issues.
Jordan Marshall adds: “Self-employment isn’t without its challenges, whether that’s getting a firm grip on your finances or finding work in an industry where you may not have many contacts.”
Keeping control of your financial affairs is a key challenge you’ll face if you’re self-employed – and that’s where financial planning can help.
How can a financial planner help you?
Taking advantage of the specialist advice of a financial planner can help you in several ways:
- It helps you to get your affairs in order
- It allows you to focus on your long-term objectives, not just day-to-day issues
- It allows you to prioritise – what is important for now and for the future
- It gives you structure and helps you to organise your finances
Many self-employed clients say the same thing: the earlier you can speak to a financial planner, the better. Clients sometimes leave speaking to a professional a few years too late; often when they are actually thinking about retiring.
The earlier you speak to a financial planner, the more time you have and the more action you can take to reach your financial goals.
So, in what ways can a financial planner help you if you’re self-employed?
Contingencies and reserves if something were to go wrong
One of the biggest worries for self-employed people is financial insecurity. Many business owners have to deal with uncertain and variable income, lurching from having too much work to not having enough, with few periods of stability in-between.
Professor Sir Cary Cooper, Professor of Organisational Psychology and Health at the University of Manchester, says: “You’re less secure, and you feel you have to accept all the work you’re offered because you don’t know when you’ll get more. There’s a lot of pressure to deliver because if you don’t, you might not get another contract.”
If your income is irregular, then having an emergency fund is critical. If a major client doesn’t pay you for a few months, you’ll need cash on hand to pay your bills. Or, if you get injured or sick, that can immediately impact your ability to earn money as there are no employee benefits to fall back on.
Experts usually recommend that you put aside three to six months’ income in an easy-access emergency fund. Your financial planner can help you to generate this fund and give you advice on the best way to build up a savings safety net.
Build up your retirement savings
Research developed by This is Money and Fidelity International has found that almost two-thirds (62%) of self-employed people today have no pension savings at all, compared with 32% of employed workers.
Despite there being pension products that could help them save for retirement, two in five self-employed workers say they’ve never heard of them.
As we noted above, one of the challenges facing self-employed workers is that income can be irregular and volatile. So, committing to a regular contribution to a personal pension can be difficult. Having the flexibility to change or vary contributions can be critical to business owners building up a retirement savings fund.
Vince Smith-Hughes, a retirement expert at Prudential, says: “It may suit some self-employed individuals to make ad hoc contributions rather than commit to a regular savings amount, and a financial adviser would be able to offer assistance.”
While employed people benefit from the ‘free money’ of their employer contributing to their pension, there are still many advantages to paying into a personal pension if you’re self-employed.
Firstly, you’ll get tax relief on your contributions, up to the lower of your annual earnings or £40,000 a year.
If you’re a basic-rate taxpayer, for every £100 you pay into your pension, the government will add an extra £25. If you pay tax at the higher rate in England, Wales or Northern Ireland of 40% you can claim back a further £25 through your tax return for every £100 you pay into your pension.
Secondly, if you are the director of a limited company, any contributions you pay to your pension are considered a deductible business expense.
Your limited company can contribute pre-taxed company income to your pension and, as your company receives tax relief against corporation tax, the company could save up to 19% in corporation tax.
Another benefit is that employers don’t have to pay National Insurance on pension contributions. The National Insurance rate for 2019/20 is 13.8%, so by contributing directly into your pension rather than paying the equivalent in salary, you save up to 13.8%.
As a self-employed worker, you have a choice of different types of pension, including:
- Personal Pension
- Self-Invested Personal Pension (SIPP)
- Stakeholder Pension
In addition, the government scheme NEST (National Employment Savings Trust) is also open to self-employed people too.
Speaking to a financial planner can help you find the best pension for your circumstances and to extract value from your company that can help you fund your future lifestyle.
Please note: A pension is a long-term investment not normally accessible until age 55. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Getting the right protection and insurance
If you’re self-employed then you don’t have some of the safety net insurances that you benefit from as an employee.
For example, there will be no Statutory Sick Pay or ‘death in service’ benefit and so you will have to make your own arrangements.
- Income Protection – if you are unable to work because of an accident or illness then you may have no income coming in. Income protection is designed to provide you with a regular income if you’re unable to work for an extended period
- Critical Illness Cover – if you are diagnosed with one of a list of serious illnesses (for example, cancer, heart attack or stroke), you may be unable to work for an extended period. Critical Illness Cover will provide you with a lump sum normally, 14-28 days after diagnosis
Plans may not cover all the definitions of a critical illness. The definitions vary between product providers and will be described within the Key Features and policy documentation of the plan
- Partnership cover – if you have set up your business as a partnership, how will the business continue if you are unable to work for a period of time? And what would happen to the business if you were to die? Partnership protection can ensure that the remaining business owners keep control of the company, providing funds to enable the remaining shareholders to buy the deceased’s shares
- Public liability insurance – does your business involve clients coming to your home? Public liability insurance covers you against the cost of claims made by members of the public for incidents that occur in connection with your business, such as personal injuries, loss of property or damage to property and death. It provides cover for incidents that occur on your premises and company-related incidents that take place off-site
- Professional indemnity insurance – this helps you in the event of a claim from a dissatisfied client, for example, if there’s an issue with your work or if you have made a mistake that has cost a client money.
Life Assurance/Critical Illness plans typically have no cash in value at any time and cover will cease at the end of term. If premiums stop, then cover will lapse.
Again, a financial planner can help you to arrange any insurance that you need to ensure your business (and your income) are protected.
Get in touch
Need help with any aspect of financial planning? Our knowledge is second to none, so you benefit from the best and most appropriate financial plan, tailored to your values and objectives.
To find out more, email admin@stonegatewealth.co.uk or call us on 01785 876222.
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