Seven things to consider before you go self-employed

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Starting a business or going self-employed can be really exciting, but it’s important to think about how your financial situation could change before you take the plunge.

Nearly 5 million people are now self-employed in the UK, according to the Office for National Statistics. This is a huge increase in numbers compared to previous years and means the financial needs of self-employed people, which can be very different from those employed by a company, need more attention.

Different types of self-employment. This image is an infographic and has alternative text available if you are using a screen reader.
Different types of self-employment
  • Sole trader: a business you run by yourself, where you keep any after-tax profits.
  • Partnership: a business you run with one or more people, who share the responsibility with you.
  • Private limited company: a business that’s separate from the people running it, is registered or incorporated, and its own ‘legal entity’.
  • Limited partnership: a business with at least one general partner, who is responsible for running it, and one limited partner.
  • Limited liability partnership: a cross between a partnership and a limited company.

Source: Money Advice Service

Here’s a breakdown of some of the key differences to your personal finances you could experience as a self-employed person, and how to manage them.

Black wallet with money

Managing uncertainty around your cashflow

If you’re self-employed, it’s unlikely you’ll be paid regularly at the end of each month (as you’d probably be used to as an employee). You might be paid smaller amounts throughout the month or larger amounts less often, depending on what you do and the number of clients or customers you have. You could also face late payment of invoices, so you might not get paid even when you’re expecting it.

This can be hard to manage, but the best way to prepare for this is to save up a cash buffer. This means you’ll be able to smooth out the bumps, with a savings pot to dip into if the cashflow dries up and also to add to when you have surplus cash.

Dealing with your accounts

You might want to set up a separate bank account for your invoice payments and for paying your work expenses or outgoings, so they don’t get confused with your personal spending from your main bank account. This can make it easier to set aside enough of your earnings for tax, and to see payments coming in and going out more easily.

Changing the way you pay tax

Employees benefit from PAYE (Pay As You Earn), which means the amount of tax they owe is calculated and paid on their behalf by an employer. When you’re self-employed, you have to register with HMRC as self-employed, so that you can fill out tax returns. You’ll have to make a note of deadlines for filing and paying your taxes (although you should also receive reminders).  

Tax is usually due once or twice a year and you might also be asked to make payments ‘on account’, which is like an advance payment. So you’ll probably need to save up a bit more than enough at first. The first time you fill out a tax return can be challenging. If you’re worried about making mistakes, it might be worth using an accountant to help you.

Read our article on self-assessment for more information on filing your tax return.

Getting insurance and a pension

When you’re an employee you could have some benefits paid for you by your employer, such as life insurance and employer pension contributions.

When you’re self-employed you lose these valuable benefits, but you can set up your own life insurance and private or personal pension. It might also be worth considering income protection insurance, to cover you in case you suffer illness or accident that prevents you from working. Private medical insurance is another type of cover you might have through a workplace but would need to arrange for yourself if you’re self-employed. If you’re unsure about anything, it’s worth speaking to an independent financial adviser who can provide advice based on your personal circumstances.

Visit the Money Advice Service for more information about life insurance, income protection insurance and private medical insurance.

Teacup and saucer

Taking time off work

The average holiday allowance is 28 days in the UK, while the average sickness absence is around four days per person. When you’re self-employed, if you don’t work you don’t earn, so it’s important when working out what you need to earn that you take into account the need for some days off during the year.

Whatever your day rate is now (your annual salary divided by your number of working days), this would probably have to be higher to take into account that you wouldn’t be paid for holidays and sick days.

Maternity and paternity leave is also a big consideration for those who are planning to have a family. Self-employed people are only eligible for maternity allowance for a certain number of weeks, and there’s no equivalent to statutory paternity pay for self-employed dads – read our Family Financial Planning Guide (page 6) for more on this. Plus, you’d need to take into account any time you might need to take off to care for children or dependants once you’re back at work.

Handling your costs

When you’re employed, your company pays for your IT equipment, the energy bills and the cost of owning and operating equipment such as printers, laptops, computers or work mobile phones. You can also usually expense things like travel.

When you work for yourself, you must cover these costs yourself, but many of them (including an accountant) will be tax deductible, meaning the cost is taken off of your income before the tax you owe is calculated. You have to provide proof of costs in the form of receipts and invoices, so good, regular bookkeeping will help you stay on top of this and minimise your tax bill.

Working out if it’s for you

Self-employment involves more administration hours, more responsibility for time management and more planning. It can feel unnerving at times, when you have less of an idea of future earnings and payment dates, the risk of losing work at short notice, as well as the need to provide things for yourself that would otherwise be offered as employee benefits. Plus, you may feel that there’s less of a balance between work and home or leisure time, as it can be harder to switch off.

That said, for some people the flexibility and ability to answer only to yourself are priceless, and make all the other challenges of self-employment worth it. This type of working suits some better than others and it’s worth considering whether it sounds right for you and your situation before taking the plunge.

Get information on self-employment

You can find support and information for self-employed people on the following websites:

Find out more about starting a business

If you’re thinking about setting up your own company, there are lots of things you need to look at before you start.

Read our top 10 questions to ask yourself before starting a business.

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