By the end of 2019, there were more than 5 million self-employed people in the UK. Working for yourself has become much more popular in the last 20 years, with the number of self-employed people increasing by more than 50% since the turn of the century.
Self-employed people now represent around 1 in 7 of all workers – 15.3% of people – and the Office for National Statistics say that two-thirds of people working for themselves are men.
While freelancing or setting up your own business has many benefits, from flexible working hours to taking control of your fortunes, there can be financial challenges to overcome.
So, if you’re self-employed, here are five practical money steps you should take.
1.Put life insurance in place
If you’re an employee – especially if you work for a larger business – your employer is likely to provide you with “death in service” benefits.
Death in service provides your loved ones with a lump sum – typically three or four times your salary – if you were to die while you’re working for that employer. It’s a valuable perk that can provide peace of mind that your family will receive financial support if you pass away.
If you’re self-employed, you’ll receive no such benefits. So, it’s vital that you make sure you take out your own life insurance.
Life insurance provides a tax-free lump sum to your beneficiaries if you die within the term of the policy. Your loved ones can use the money to replace your income, repay debts such as a mortgage, and to maintain their lifestyle when you’re no longer around.
If you work for yourself, you should make sure you have the right protection. If you’re not sure whether you need cover, read our blog about the 5 types of people who need life insurance which has some useful tips and hints.
You can also read about why life insurance is cheaper and more reliable than you might think.
Life insurance starts from around £6 per month so it’s a cheap and effective way to protect your loved ones.
2.Start a pension
Saving into a pension is vital if you want to generate an income in later life when you stop working. In 2021/22 the State Pension is just £179.60 per week, which means it’s unlikely to provide enough for you to maintain your lifestyle.
Since the auto-enrolment rules came into effect, every employer in the UK must put certain staff into a workplace pension scheme and contribute towards it. So, if you’re employed, the chances are that you’ll have access to a pension scheme which your employer will pay in to.
If you’re self-employed, you will have to make your own pension provision. You are personally responsible for making sure that you save enough for your retirement.
There are many benefits to paying into a pension:
- It’s a highly tax-efficient way of saving for your future. If you’re a basic rate taxpayer, tax relief means that every £100 that goes into your pension only costs you £80. If you’re a higher- or additional-rate taxpayer, you can claim additional 20% or 25% tax relief through your self-assessment tax return.
- You can invest your contributions in fund aligned with your tolerance for risk. Over many years these can provide investment returns which can boost your pot at retirement.
- You can typically take 25% of your pension pot as a tax-free lump sum when you retire.
According to the Money Advice Service, just 31% of self-employed people are paying into a pension. Making pension provision is essential to retirement planning and so, if you work for yourself, you should make this a priority.
3.Take out income protection
One of the downsides of running your own business is that you don’t benefit from any of the financial perks of being an employee. For example, if you’re self-employed there’s no sick pay if you can’t work due to ill health.
So, if you work for yourself, it is absolutely critical that you have adequate insurance in place to protect and support you and your family if you can’t work due to illness or injury.
Income protection will provide you with a regular income in the event you are off work for a period of time. It’s designed to ensure there is financial support available when you need it, enabling you to pay your regular bills and commitments.
Many income protection policies will let you choose a “deferral period” – essentially how long you wait before the policy starts paying an income. This is typically 4, 8 or 12 weeks. Plans with a longer deferral period tend to be cheaper, but you need to consider if you can afford to go without an income for a longer period.
Read more about income protection on our website.
4.Setup an emergency fund
As we have seen in recent years, it’s impossible to predict what the future might bring. So, if you work for yourself, it’s vital that you build and maintain an emergency fund.
Most experts suggest keeping three to six months’ earnings in an easy-access account – perhaps a Cash ISA or similar. This gives you a financial cushion if you’re ever struggling for work or you face unexpected expenses such as a leaking roof, new boiler, or car repairs.
Having a rainy-day fund in place gives you the peace of mind that there’s always some cash you can use if things don’t go quite to plan.
5.Make your National Insurance contributions
In order to qualify for the new State Pension, you need to have made 35 years National Insurance contributions. So, when you become self-employed, you need to make sure that you are paying enough National Insurance contributions to build qualifying years for your State Pension.
For example, if you’re the director of your own limited company, and you take your earnings through dividends, you won’t pay any National Insurance on dividend income. So, you may need to pay voluntary National Insurance contributions to build up State Pension qualifying years.
As an employee, you will ordinarily pay Class 1 National Insurance contributions. When you become self-employed, you will instead pay Class 2 and Class 4 contributions.
Your life insurance and income protection experts
At I’m Insured, we have wide experience working with self-employed people, from sole traders and freelancers to directors of limited companies.
We can help you to find the right life insurance, Critical Illness cover, and income protection for your needs. As we work with dozens of the UK’s leading insurers, we can not only find the right cover, but also secure the lowest premiums for the protection you need.
Indeed, we intentionally take a lower than standard commission from insurers so we can pass on the savings to you.
- Compare life insurance and income protection from the UK's most reputable providers including Aviva, Legal & General, and Royal London
- Our service is fast, free, and secure
- We can also help you to find specialist life insurance cover.
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