Self-employed finance guide

Jade Wimbledon

by , Digital content producer

16 Jan 2017 /  

16
Jan 2017

Self-employed finance guide

If you’re self-employed, you generally have to give more thought to financial management than employed people. For starters, you have to calculate your business profits and file an annual tax return, whereas most employees have tax deducted before their pay reaches their bank account. And when it comes to financial products like mortgages and pensions, being self-employed can make things a little more complex too. Follow our self-employed finance guide to get your money-related ducks in a row.

Business bank account

Sole traders can choose to use their personal bank account for business purposes, but most limited companies are required to have separate business bank accounts.

The small print is likely to say that the account is for personal use only

Whichever structure you have in place, it’s usually a good idea to open a business bank account. This helps you keep your business finances and your personal finances separate, and should make it easier to complete your tax return and to provide evidence of your business transactions to HMRC if necessary.

Plus, the small print of your personal bank account is likely to say that the account is for personal use only. Your bank may threaten to close your account and tell you to open a business account if they realise you’re using your personal account for business purposes.

Opening a business bank account

Unlike most personal bank accounts, you’ll have to pay a fee for your business bank account, usually of around £5 to £10 per month. However, most accounts offer an initial fee-free period of one or two years. Bear in mind that any transaction that’s considered ‘non-standard’ will incur an extra charge, even within the fee-free period.

Business records

If you’ve set up a limited company, there are quite a lot of rules governing the company records and the accounting records you need to keep. Many people hire an accountant to help them comply with these rules. You’ll need to record company spending, assets, debts and stock, for example.

If you’re set up as a sole trader, you need to keep records of your business income and expenditure, so that you can give the numbers to HMRC when you complete your tax return.

Keeping business records

Money and time

Get into the habit of keeping records of all your transactions, including your receipts, bank statements and invoices. If HMRC query the figures in your tax return, you need to be able to provide evidence to support your numbers.

It may be a good idea to create a spreadsheet that you update regularly with your income and outgoings, and there are also lots of apps for self-employed workers that can help you save and organise your receipts and other paperwork. Check out online accountancy platforms like FreeAgent, as they can simplify your bookkeeping greatly for a reasonable monthly fee.

Insurance

Business insurance isn’t a legal requirement for most self-employed workers, although if you take on any staff then you’re usually required to have employers’ liability insurance. However, you may find that your client contracts and/or your professional bodies require you to have certain type of business insurance in place.

Getting business insurance

The two main types of business insurance are public liability insurance and professional indemnity insurance. Public liability insurance can pay compensation claims if someone sues you for injury or damage - if someone trips over in your shop, or if your equipment falls and damages something, for example. Professional indemnity insurance can pay compensation claims if your client sues you for negligence or making a mistake, including accidentally breaching confidentiality or violating copyright.

Even if your client contracts and professional bodies don’t require you to have insurance, it may be a good idea anyway, as compensation claims can be very high.

Business insurance like professional indemnity and public liability insurance counts as an ‘allowable expense’, so the cost can be deducted when you’re working out your taxable income. Online insurance brokers like Simply Business can help you find a range of covers, from a range of insurers, but it can be worth exploring more specialist alternatives like Digital Risks if your needs are very specific.

Pensions

PensionBee desktop

When you’re an employee, your employer will usually enrol you into a workplace pension scheme, but when you’re self-employed it’s up to you to make pension arrangements.

It’s an aspect of self-employment finance that’s easy to overlook - only around 18% of self-employed people are contributing to a pension, compared to almost half of employees - but it’s really important to make sure you put away enough money for your retirement.

Setting up a pension

As a self-employed worker, you can open a personal pension. If you have previous pensions, you can choose to combine them into a PensionBee pension, a personal pension that you can manage online.

Although you won’t get employer contributions if you’re self-employed, you will still benefit from generous tax relief, so the government adds £20 for every £80 you put in your pension if you’re a basic rate taxpayer. If you’re paying tax at a higher rate, you can claim back further tax relief through your tax return.

Your pension saving will benefit from generous tax relief

If you run a limited company, you may be able to make employer contributions into your pension instead, which also comes with tax benefits.

There’s lots more information about this topic on our page about private pensions for the self-employed, and you can also download our free self-employed guide to pensions.

Mortgage

It’s certainly not impossible to get a mortgage when you’re self-employed, but it can be more difficult than it is for employed people. You’ll usually need to provide proof of your income for the last two or three years (your tax return submissions, for example) and the lender is likely to use these to calculate your average income and decide how much they’ll lend you.

Remember that you’ll also need to pass an affordability check, so your everyday outgoings will also be scrutinised to check that you can afford the mortgage repayments.

Getting a mortgage

Since it can be trickier to find a mortgage lender when you’re self-employed, you may need to go to a broker. There are also online brokers that may be able to help you find a mortgage deal. When you’re comparing mortgages, look at the arrangement fees, interest rates and mortgage terms, and seek advice if you’re unsure. Startup broker Trussle have been picking up excellent reviews from their customers, so they’re an option that’s well worth exploring if you’re feeling a little stuck.

Tax

Tax calculations

When you’re self-employed, you’re responsible for filing a Self Assessment tax return and paying any tax owed to HMRC. When you complete your tax return you’ll need to declare your business turnover and your ‘allowable expenses’, which are the costs that you can deduct from your turnover to calculate your taxable profit. You may want to get help from an accountant.

Completing your tax return

Avoid nasty surprises from HMRC by making sure you understand how much you’re likely to owe and putting money aside throughout the year. Remember to include National Insurance contributions and any student loan repayments in your calculation, and understand that the ‘payment on account’ system means that following your first year of business, you may have to pay 150% of the amount you were expecting.

The deadline for online tax returns is 31 January. Check out our 10 top tips for filing your tax return.

How do you keep on top of your finances? Tell us in the comments section at the bottom of the page.

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Sort your pension

Sign up to PensionBee and we’ll combine your old pensions into a new plan that you can manage online.

Sign up now

Capital at risk

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