Financial planning for the self employed

20 February 2020

The number of people running their own businesses has soared in recent years. Read our guide to financial planning when you're self employed:



Research in mid-2019 by the organisation Rest Less shone a light on what many people in work over the age of 50 already knew to be true: the inexorable rise of self-employment in the UK.

This is particularly the case within the older demographic, with the findings revealing that more than two and quarter million over 50s are now self-employed. This in itself is a rise from 1.45 million in 2009 and an increase of 57 per cent over the course of a decade.

Older people may choose self-employment to supplement a pension or because they feel they still have much to offer. Perhaps they had to retire young or a hobby has turned into a job.

Book-keeping, driving, consultancy, teaching, even mystery shopping are all popular. Trading on the internet or at car-boot sales is also common. Selling your own things is not self-employment - buying them to sell is.

Self-employment offers greater flexibility – with the simplicity and ubiquity of new technology being a major driver of this opportunity to map out your own work destiny, and plot a better work-life balance.

And self employment can of course prove to be an exciting new adventure, as you become immersed in the day to day ramifications of running and building your own business. But it’s important not to neglect your personal finances in the process.

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This means pensions, insurance, protection, tax, and state benefits all need to be considered when thinking about your self-employed finances.

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, while changes to the system made back in April 2015 ensured 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.

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 (NIC) if your profits are £6,365 or more a year for tax year 2019-20, or £6,205 in the 2018/19 tax year. Should you exceed this limit, you will pay £2.95 a week, or £153.40 a year for the 2018/19 tax year. For the 2019/20 tax year, this works out at £3 a week or £156 a year.

If your self-employed profits are above £50,000, you will pay Class 4 NIC at a rate of 2%.

Once you reach state pension age, Class 2 contributions should stop. These count for every whole tax year you pay them. Class 2 does not give entitlement to benefits if you are sick or have no work.

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 online. Make sure too that you register by 5 October in your business’s second tax year or you could be fined.

Your self-assessment must be done online and will take account of any other income (including any pension), tax allowances and pension contributions to work out what tax is due.

Don't get caught out

HM Revenue & Customs says that if you do any activity to earn money on your own account then that is self-employment. It doesn’t matter if you earn very little or even make a loss, you are still self-employed and must register with HMRC. You can do that up to October 5 after the tax year you first become self-employed – if you don’t, you can be fined £100.

HMRC trawls through small ads, supermarket boards and websites to find unregistered sole traders. You must keep accounts and pay tax on your profits through self-assessment. Find out more at gov.uk/register-for-self-assessment.

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State benefits

You will receive 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 the limits on cover.

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.

Purchases by the self employed

Anything you buy for use in your business such as stationery, equipment, online services and anything you buy to sell can all be deducted in full. Computers and larger capital items are treated separately, but capital expenses of up to £250,000 a year are currently allowed in full.

Travel by the self employed

Keep all receipts and tickets for buses, trains, car parking, taxis, hotels or any business travel. That can include travelling to premises where you provide a service. If you use your own car then measure the mileage you do for business and charge that proportion of fuel, servicing, repairs, breakdown service, insurance - and interest on a loan to buy a vehicle.

Need help starting up? Read our tips for applying for a business loan

Phones and broadband for the self employed

Your mobile, broadband and landline will probably be shared between business and personal. Work out how much of that is a business expense. There’s no need to split it exactly every month – just work out the proportion over a period.

Offices space at home for the self employed

The full cost of an office or storage space for the business is an allowable expense. If you use one room of your home as an office and you have four rooms then a quarter of your household expenses such as energy, insurance and council tax – and rent or mortgage interest if you pay it – can be counted as a business expense. Alternatively you can deduct a reasonable monthly amount. 

Professional services and the self employed

If you pay someone for advice or help, such as an agent, an adviser, a lawyer, an internet designer or a PR person, then their fees are allowable as a business expense. So are the services of an accountant – except for the cost of preparing a tax return. Interest paid on business loans or credit cards is permissable.

Expenses and the self-employed

These costs have to be incurred ‘wholly and exclusively’ for your business. The cost of buying or cleaning clothing, for example, cannot be claimed unless it is a distinctive outfit – perhaps you need decorator’s overalls. But a smart suit or skirt and top will not count, even if you would only ever wear it for work. Client entertainment is not permissable.

Do you need professional indemnity insurance? Find out more

Self-employed or employed?

Some employers treat temporary workers as if they were self-employed rather than employees so they do not have to operate a PAYE system or pay employer’s NI or pension contributions. Self-employed people have no right to sick leave or holidays.

If you have several clients, you tend to work with your own equipment or on your own premises, and you decide when you work, then you are probably self-employed. However, if you have one client, travel to their premises, use their equipment and do what you are told, then you are probably an employee. For details, visit gov.uk/employment-status

IR35 and the self employed

If you’re self employed, you may just about have heard of IR35. But what is it? And does it apply to you? It’s a change in legislation which starts in April 2020 which sets out how tax and National Insurance should be applied to freelancers and contractors who provide services under the umbrella of their own company. Find out more at gov.uk

VAT and the self employed

If your turnover – not profit – exceeds £85,000 a year you must register for VAT.

VAT taxable turnover is the total value of everything you sell that is not exempt from VAT. You can usually reclaim VAT paid on goods and services if purchased for sole use in your business. Visit gov.uk/vat and gov.uk/vat-registration to find out more.

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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.