Financial planning for the self employed

27 January 2015 ( 09 March 2017 )

The number of people running their own businesses has soared since the financial crisis - here's our guide to self employed finance.



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According to entrepreneurs’ platform, Smarta, one in six new businesses is set up by someone aged over 50.

Self-employment offers flexibility and an exciting new adventure, making it easy to get caught up in making a go of your business and neglect your personal finances in the process. 

Yet pensions, insurance, protection, tax, and state benefits all need consideration when thinking about your self-employed finances. 

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Pensions for the self-employed

If you’re self-employed you don’t get the benefit of employer pension contributions, so need to consider your own arrangements. Saving into a pension gives valuable tax relief, with changes to the system from April 2015 ensuring you have the freedom to use your fund as you wish at retirement.

Options include stakeholder pensions, which are simple and have capped charges, as well as low, flexible minimum contributions. Alternatively, you could go for a self-invested personal pension, with wider investment choice.

If you have already built up a substantial fund, you could continue to save into ISAs or other savings vehicles instead, but make sure you continue to set money aside for retirement.

For more information on ISAs as an alternative saving option, please click here.

Paying tax when you are self-employed

You will be in charge of paying your tax liability and national insurance contributions. These won’t be deduced from your employment income automatically.

If you set up as a sole trader, you pay income tax through self-assessment. The first payment is due on January 31 following the end of the tax year, so ensure you’re putting away money to cover what you expect to owe. 

You will pay Class 2 national insurance contributions f your profits are £5,965 or more a year, at £2.80 a week for tax year 2016-17. However, if you earn less than £5,965, you might not have to pay these.

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Alternatively, if you set up as a limited company, you will have to file accounts and annual returns at Companies House and pay corporation tax each year.

Whichever route you choose, you must register with HMRC helpline as newly self-employed on 0845 915 4515 or online. Do this by the third calendar month after you start, or face an automatic £100 penalty.

Six taxes you can legally avoid

State benefits

You will get a state pension as a self-employed person, provided you have made 35 years’ worth of national insurance contributions.

It’s worth checking if you’re able to access a start-up grant to help with the cost of setting up your business. To find out more on different sources of funding go to gov.uk, which has a ‘finance finder’ tool to see which schemes you might qualify for. The website startups.co.uk also has information on where to find grants.

Protection and insurance

Speak to specialists to ensure you’re covered. For example, you might be advised to take out public liability insurance if your business involves clients coming to your home.

The basics, such as home contents insurance, will cover you if you have stock and equipment at home that could be damaged or stolen, but check limits on cover.

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You may want to invest in income protection insurance to provide a tax-free income should you be unable to work because of an accident or illness. For the over-50s this could be worth getting with the risk of illness rising with age and impacting your cashflow.

Next article: Five tips for applying for business loans >>>

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The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.