Self-employment is on the rise once again. While the UK economy saw a dip in self-employment during the turbulence of 2020 and 2021, these numbers have been climbing steadily once again ever since. 

There are a lot of compelling reasons to go self-employed. For starters, it allows for a lot more flexibility with working hours – and, of course, where you work from. What’s more, depending on the industry, it can mean increased earning potential, allow for more creative freedom, and, in some cases, better job satisfaction, too. 

As with anything that promises great things, however, there are some setbacks to consider, particularly when it comes to your finances. Self-employed people need to consider the added burden of filing for self-assessment each tax year, along with the inherent risks that come from being solely responsible for their income. While most employed people receive a regular salary, self-employed people have to adapt to a fluctuating income, particularly if they’re unable to work. 

But don’t let that deter you straight away. With the right eyes-wide-open approach, you can certainly make it work. After all, right now, there are almost 4.4 million people registered as self-employed within the UK – and many of them are enjoying the benefits of working for themselves. 

1. How are you protecting your income? 

We all need to take the time to consider the worst-case scenarios, and how we are protected against them if they do happen. There are a lot of different ‘what ifs’ to answer, and they do change depending on your employment status.

When a person is employed, they are relatively well protected against the risk of loss of income. For instance, they are entitled to a certain amount of statutory sick pay should they be unable to work for a prolonged period due to illness or injury. They are also entitled to a certain amount of maternity leave and paid sick days, depending on the terms specified in their employment contract. 

One of the biggest downsides to self-employment is the lack of benefits and securities offered against illness and injury. It means that, where an employed person can take a day or two off from work when they come down with the flu during winter, you need to think very carefully about whether you can even afford to take that R&R. 

The odd sick day here or there shouldn’t place too much of a burden on your finances, but you need to think very carefully about what you would do if you suddenly became more seriously ill and needed to take your foot off the pedal for a prolonged period of time. The risk is always there, even if you feel fit as a fiddle right now. 

Your options

For self-employed people, there are a number of ways to protect your financial health and ensure a safeguard between their income and their ability to work. One of the most popular options is Income Protection, which offers a percentage of your usual monthly income (often in the region of 50% to 60%) if you’re unable to continue working as usual. 

Different policies will offer different levels of protection over different durations. While some will cover you until you’re able to return to work, some will only cover you for a few months or years. Avoid jumping in, and remember that independent financial advice here is key since there will be plenty of sales representatives talking up specific products and failing to present you with the bigger picture. 

One alternative is Critical Illness Cover, which tends to pay out a lump sum (free from tax) if you’re diagnosed with one of a number of illnesses covered by the policy. This sum is generally used to make a home more accessible – say, retrofitting stair-lifts – or pay off debts that would otherwise represent major burdens if you’re unemployed. Don’t confuse critical illness cover with life insurance – the former is unlikely to pay out anything if you die. 

2. How are you optimising/growing your savings? 

This is a question we all need to consider, whether we’re employed, self-employed, or not currently working. It’s all too easy to get complacent about our savings – to keep them in the same, low-yield savings account they’ve always been in, making contributions as and when we can, and getting by on the knowledge that they’re there if we need them. 

This is great for our peace of mind – after all, a rainy-day fund is an essential part of good financial health – but there’s only so far peace of mind can actually take us. 

We recently put together a guide to why current bank savings rates are so poor, and how important it is that we get more proactive about growing our savings and getting more out of them over the long term. 

If you’re self-employed, then knowing your savings are gradually generating a healthy return is a great way to combat the stress and uncertainty of taking the odd sick day here or there or going away on holiday. While employed people are entitled to a certain amount of PTO – again, depending on the terms of their contract and how many hours they are contracted to work for their employer each week or month – self-employed people have to accept a loss of income on the days they don’t work. 

Building a strong investment portfolio over the years you spend working is an excellent complement to your pension (more on that below), and it means that you’re not solely reliant on every single hour you spend working. True, the typical investor doesn’t generate enough money to cut down their hours or stop working, but the right portfolio would ease some of the burden on your shoulders when you start thinking about the future. 

3. What are you doing to secure your retirement? 

Employers are legally required to enrol employees in a pension scheme if they’re based in the UK, earning more than £10,000 per year, and over the age of 22 (but below state pension age). For those who are employed, it’s always worth investigating ways of bolstering their pensions with voluntary contributions and considered investments but at the bare minimum, eligible employees know that their pension is receiving regular contributions. 

When you’re self-employed, you don’t have that same luxury, and a fluctuating income can make it a little trickier to volunteer those regular contributions. 

But working toward the long-term goal of retirement is very important, and knowing how you’re going to get there isn’t something you can afford to sweep under the rug or downplay until future notice. 

Like those who are in employment, self-employed people are entitled to a state pension, but most of us have financial goals that require an additional pension to support what we will get from the government. 

The good news is that any contributions you make to your pension will be entitled to tax relief (provided you don’t exceed your contribution allowances). So, each time you make a voluntary contribution to your pension, it will be effectively ‘topped up’ by the government. This is a great opportunity to take advantage of, sooner rather than later. 

Since you won’t have an employer choosing which pension scheme to enrol you on, you’ll need to carefully consider the options available to you. Again, independent advice is key at this stage. Restricted advisors are tied to a limited number of options without the requirement to research the market independently.  

At Perennial Wealth, we take in the full scope of options. Our clients trust us to create the strongest possible plan for them because that’s what we excel at and it’s what we’re passionate about. 

Making it work

We all need to check in on our financial health regularly and ensure we’re not taking our finger off the pulse when it comes to aligning our lifestyles (and our long-term plans) with our earnings. Self-employed people have a few more risks to consider but with the right approach, that doesn’t have to translate to long, sleepless nights and a heavy weight on your back. It’s more than possible to protect your interests, your income, and your lifestyle. 

At Perennial Wealth, we are well-practised in helping self-employed people work on boosting their finances and getting the very most out of the money they’re working hard to earn. It’s always best to take the ‘little and often’ approach rather than burying your head in the sand for ten years before you take a fresh look at your financial plan. 

Get in touch with us today to find out more about how we can help you create a sound, unbiased plan, and avoid self-employment from feeling like a series of straws weighing heavy on the camel’s back.