Financial Planning Strategy for the Self-Employed (Part 1)

There is no doubt that despite the benefits of being self-employed, it does come with a degree of financial uncertainty and it can be challenging to plan for the future. However, there are ways to manage your finances to ensure that you are prepared for unexpected expenses and can work towards long-term financial goals. Here is my 7 part strategy..

1. The importance of pension contributions:

When you're self-employed, it's easy to overlook saving for retirement. In fact, there are 4.8 million self-employed people in the UK (equating to 15% of the workforce), but only 31% pay into a pension*. This means setting up a personal pension plan, contributing to a self-invested personal pension (SIPP), or joining a workplace pension scheme if you employ staff.

If you are a higher or additional rate taxpayer, it will also be necessary to claim the full tax relief on contributions made via self-assessment. The UK's top earners missed out on an eye-watering ￡1.3bn in unclaimed pension tax relief between 2016/17 and 2020/21, a recent analysis from PensionBee found.

Additionally, if you are a director of your own limited company, you will have the option to make employer pension contributions as well as personal pension contributions (see my article titled 'Run a Ltd Company? Kill 2 birds with 1 stone).

2. Making National Insurance contributions:

These payments contribute towards your state pension entitlement and other benefits, such as statutory maternity and sick pay. You will need 35 ‘qualifying years’ of National Insurance contributions to qualify for the full State Pension.

Your method of payment when you become self-employed can impact your National Insurance contributions, especially if you operate as a director of a limited company. As a director, you have the freedom to choose your own payment structure, which can affect your National Insurance liability. It is worth noting that dividend income is exempt from National Insurance payments. Therefore, it is important to ensure that you pay enough National Insurance to qualify for state pension entitlements.

3. Sick pay and income protection when you’re self-employed:

As a self-employed individual, you're not entitled to sick pay. This means that if you fall ill or are unable to work, you won't receive any financial support. It's important to consider purchasing income protection insurance to protect yourself financially in case of illness or injury.

When considering an income protection plan, you need to look at the deferral period. Plans with a longer deferral period tend to have cheaper premiums, but you need to consider if you can afford to go without pay for a longer period of time.

Come back next week for the remainder of my Financial Planning Strategy for the Self-Employed.

* Source: The Money Advice Service, 2020

The value of an investment may go down as well as up, and you may get back less than you originally invested.

Prevailing tax rates and reliefs depend on your individual circumstances and are subject to change.