EXPERTS have revealed how to financially protect yourself if you are self-employed – from building an emergency fund to making sure you have income protection insurance.
Self-employed individuals don’t have the financial protection of the employed which makes it essential that they put protections in place.
Contracted employees are guaranteed paid holiday, rest breaks, sick pay and maternity leave – benefits not available to the self-employed.
Newspage spoke to experts who shared what you need to do. Advice includes creating a financial buffer before having a child, contributing to a pension, setting aside 30% of profits for tax, setting up a business account and making sure you have income protection insurance.
Harriet Morton-Liddle, Co-Founder at Nugget Savings, said it’s important to think ahead if you are planning to have children.
She added: “Both men and women who are planning to have a child need to think ahead financially, particularly if they’re self-employed. Unlike employed parents, there’s no enhanced maternity or paternity pay safety net – and any statutory support is minimal – which means most families have to proactively save if they want time off with their baby.
“Self-employed women may be entitled to Maternity Allowance, but this is significantly lower than most salaries and often isn’t enough to cover everyday living costs. Meanwhile, self-employed dads-to-be don’t receive any statutory paternity pay at all.
“As a result, parental leave for the self-employed relies almost entirely on forward planning – building savings, modelling reduced income, and creating a realistic financial buffer well before the baby arrives.”
Think ahead financially
Lisa Tipton, Director of Financial Planning at Stockton-on-Tees-based New World Financial Group, said the self-employed need to contribute to a pension.
She continued: “Being self-employed can offer flexibility and control, but it also means taking responsibility for your financial safety net. Key considerations include: Plan for the unexpected: insurance such as income protection can help provide a replacement income if illness stops you working.
“Plan for your future self: pension contributions benefit from tax relief and can help you to build long term financial security. Plan for time off: holidays, parental leave and sickness can all result in no income, factor this into your planning. Build an emergency fund: to help manage income dips, late payments or unexpected costs.
“Don’t forget about tax: if you’re self-employed, you’ll pay tax through self-assessment, so it’s important to set money aside. Work with professionals: accountants and financial planners can help you avoid errors, manage tax efficiently and plan for your long term goals. Investments can go down as well as up and tax treatment depends on individual circumstances.”
Chloe Mount, Director at Rotherham-based Tunstall Accounting, said setting aside profits for tax is important.
She added: “For most sole traders in the basic rate tax band, a sensible rule of thumb is to set aside around 30% of profits for tax. This helps cover tax and NI and provides a buffer if the bill is higher than expected. In the first year of trading, this is especially important, as payments on account mean you may need to pay an additional 50% of that first year’s bill upfront.
“Having a separate business bank account is one of the simplest but most effective steps a self-employed person can take. It keeps finances clear, makes expense tracking far easier and removes a lot of stress when it comes to preparing tax returns.
“Working with an accountant can prevent costly mistakes, ensure all allowable expenses are claimed and give reassurance that everything is being handled correctly. With Making Tax Digital (MTD) on the horizon, early preparation is key. Using accounting software now not only supports future compliance but also gives real-time visibility over profits and cashflow.”
A savings buffer is important
Jamie Alexander, Mortgage Director at Romsey-based Alexander Southwell Mortgages, advised setting up a business account.
He continued: “There is zero fallback that employees rely on when you are self-employed. That means you have to build your own, starting with clarity over your finances. Keeping business and personal money separate is essential. A dedicated business account shows what you truly earn and what you can safely take, reducing stress in quieter months.
“Tax should be set aside as soon as you’re paid, payments on account catch people out because the money was never really yours. A savings buffer is just as important. Even with my own personal circumstances, I use accounting software Xero, which keeps everything in order. It is a constant reminder to stay on top of finances.
“I would still recommend three to six months of essential costs, minimum. Most importantly, protect your income. If you’re ill long-term, your income usually stops and the state support available is minimal. Income protection keeps your mortgage, bills and lifestyle covered when there’s no sick pay or employer support.”
Look after you
Austyn Johnson, Founder at Colchester-based Mortgages For Actors, said you need income protection insurance in place.
He added: “If you are self employed – you are your business. If you don’t have income protection in place, you are hugely risking everything that underpins your life. Mortgage, rent, bills, food and clothes. It’s not worth skipping what is a relatively small monthly payment because you think it won’t happen to you.
“If it happened and you were not covered, you could always just quit the very thing you set up with your blood, sweat, dreams and passion, before you end up back on the job line working towards someone else’s dreams. Look after you.”
Photo by Kaffeebart on Unsplash.
