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Financial planning for the self-employed

Katie Price
Katie Price

One in seven of the UK working population is now self-employed. Evan Duffus of Acumen Financial Planning, outlines some savvy steps they can take to safeguard their finances

When entering the world of self-employment or contracting as a limited company, there are many financial planning aspects that need to be considered.

Changing employment status is an ideal time to review your overall plans and lifetime objectives.

You should also consider the benefits that were sacrificed on leaving an employed position and whether or not you should aim to replace them.

Depending on your circumstances, these benefits will vary in relevance.

But if your financial objectives are put at risk by losing benefits from employment then now is the time to address matters.

One major perk often given up when leaving employment to embark on self-employment or contracting is death-in-service benefit.

This can be replaced with life cover. Rather than simply replace what you have lost, ascertain the level of cover you actually need.

Consider short and long-term capital requirements of your dependants, liabilities that need repaid on death – such as a mortgage – and any existing cover you already have.

A level of continued income in the event of illness is also something that is often built into a contract of employment.

In the world of self-employment, you need to make your own provision.

If you were to fall ill, how would you and your family cope financially? What fixed monthly outgoings still need to be met? What expenses could be tightened if your income ceases?

Rather than replacing any lost benefits on a like-for-like basis look at how much cover you actually need and for what length of time.

Becoming self-employed or starting out as a contractor means you will have no access to an occupational pension scheme and will have to make your own plans.

Although you will not benefit from employer contributions, there are tax breaks that encourage you to fund a pension.

Making pension contributions out of the capital in your own company will reduce corporation tax and move money from your business into a tax-efficient pension in your own name.

Review any existing pensions and undertake robust analysis to see how much you need to contribute to secure your desired level of income in later life.

Working for yourself allows you to optimise your affairs to reduce your tax bill. If working under the structure of a limited company, consider paying yourself a lower base salary and topping this up with dividends to reduce income tax.

Think about retaining any capital surplus to your requirements within the company rather than extracting it unnecessarily, especially if this will push you into a higher tax bracket.