5 urgent financial steps you should take if you’re self-employed


self-employed young woman works outside on her laptop

While the Covid-19 pandemic has taken its toll on many people, many self-employed people have been particularly hard hit. This is to the extent that, according to figures published by iNews, the number of solo self-employed workers in the UK fell from 4.3 million in 2020 to 4.1 million in 2021.

If you’re self-employed, you will be well aware of the difficulties the last two years have brought. You will also understand that those who own and operate their own business have vastly different financial needs to those who earn a regular, salaried income.

To help you organise your finances, read on for five financial steps you should take if you are self-employed.

1. Build an emergency fund

Although everyone should retain an emergency fund, it is perhaps even more crucial if you run your own business.

An emergency fund is a sum in an easy access savings account earmarked to help you cope financially when the unexpected happens. This might be a sudden loss of income or a large surprise payment, such as a new boiler or car repairs.

Being self-employed often means that your income is less certain than a salaried employee, and your earnings may fluctuate from month to month. An emergency fund will help meet any costs you might not be able to cover yourself during volatile periods.

Experts recommend that an emergency fund consists of three to six months’ worth of essential expenses, so that you can support yourself if you face an unexpected event – like a national lockdown that might have forced you to shut down your business.

2. Make sure your family are protected

Being self-employed comes with many benefits. You can work to your own timetable, “be your own boss” and control the strategic direction of your company. However, one of the downsides is that you typically won’t receive any workplace benefits.

Employed workers will typically benefit from “death in service” cover, which pays out a tax-free lump sum to their beneficiaries if they were to die while in the employment of that business.

Since self-employed people won’t receive this perk, you will be responsible for making sure your family receive financial support if the worst should happen.

Could your loved ones continue to live in your home if you were no longer around? Would they be able to maintain their lifestyle without your earnings?

If the answer is “no”, then think about putting some protection in place. It can give you the peace of mind that your loved ones will be financially supported if you pass away, and could really help your family navigate the difficult time that will follow your death.

Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

3. Ensure you can pay your bills if you can’t work

Another workplace benefit that self-employed people miss out on is sick pay. Quite simply, if you run your own business then, if you are too ill to work, you might not get paid.

While this may just be an inconvenience when you have the flu or a stomach bug for a few days, it could be a huge problem if you experience something worse.

A broken bone or severe illness could stop you working for months, which could jeopardise your savings and financial security. As such, making sure you would continue to receive an income in this eventuality can help you to navigate this situation.

There are many income protection choices, so speak to an expert to make sure you get the right cover for you.

4. Contribute to your pension

If you’re self-employed, without access to a workplace scheme, you will also need to organise your pension. You’ll have the responsibility to ensure you have enough savings to fuel the retirement lifestyle you desire.

If you have paid National Insurance contributions (NICs) throughout you working life, then it’s likely you’ll be eligible for the State Pension when you reach State Pension Age (66 in 2022). However, in the 2022/23 tax year the full new State Pension will be £185.15 a week (£9,628 a year), which is unlikely to be enough for you to maintain your lifestyle when you retire.

Which? reports that the average household of two people spends about £26,000 a year in retirement as of 2021. This includes basic expenditure with a few added luxuries like regular meals out and a European holiday.

To make up any shortfall, you need to make your own pension contributions into a personal pension or self-invested personal pension (SIPP).

Pensions come with different fees and charges depending on your provider, so be sure you fully understand them before making a choice. We can build a financial plan to help you to save for later life, and to ensure you have sufficient funds to enjoy the type of retirement you want.

5. Work with a financial planner

Working for yourself can be a rewarding challenge, although alongside your business decisions you will have to organise all your personal finances.

As financial planners, we can work with you to ensure your loved ones are protected, manage the risks to your lifestyle, and ensure you’re saving the right amount for the short, medium, and long term.

Email info@investmentsense.co.uk or call 0115 933 8433 to find out more.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.