Being self-employed can offer more flexibility than a salaried job. Self-employed workers usually have more autonomy to control their own workload, working hours and even where they want to work from. But being self-employed can complicate your personal finances.
Many freelancers and contractors will have a fluctuating income. So saving and planning for the future can be more difficult. When it comes to financial products, you might need to jump through more hoops to get a mortgage or rental contract. While setting up a pension will be down to you rather than an employer.
However, with the right planning, many self-employed workers thrive financially. Here are seven things to consider if you’re self-employed and are looking to improve your financial health.
1. Understand your income
When you’re self-employed, your income can fluctuate from month to month, making budgeting more complicated. This means it’s essential to build a financial buffer like an accessible savings pot or an emergency fund. You’ll need money to cover holidays and sickness too. Unlike employed workers, freelancers and contractors don’t benefit from paid annual leave or Statutory Sick Pay (SSP).
Self-employed workers also have to do a Self-Assessment tax return and will need to put money aside for their tax bill. Payments to HMRC are due by 31 January and 31 July each year for sole traders. The best way to make sure you have enough money to pay the tax due is to stash away a percentage of each invoice you’re paid. Many people use an accountant or a qualified Independent Financial Adviser (IFA) to help with managing personal taxation.
2. Set up a pension
If you’re self-employed you don’t qualify for Auto-Enrolment. This means you don’t have an employer contributing to your pension (even if you work with a company long term). It’s entirely up to you to both set up a pension and manage regular contributions to it. The pension options for self-employed workers in the UK include:
Self-Invested Personal Pensions (SIPPs).
With a private or personal pension, you can choose from a selection of available funds and a pension provider invests money into them on your behalf. These are defined contribution schemes where the amount you pay in will help determine the size of your retirement pot. PensionBee offers a flexible self-employed pension.
With a SIPP you can typically choose from a wider range of investments for your money.
With both, private pensions and SIPPs, you’ll benefit from tax relief on your contributions. Tax relief is applied on the lower of 100% of your earnings or £60,000 for tax year 2024/25.
Self-employed workers are also eligible for the State Pension which is based on your National Insurance (NI) contributions. Currently, you need to have at least 10 qualifying years of NI contributions to receive the minimum. You need 35 qualifying years of NI contributions to receive the full new State Pension. You can check your NI record at gov.uk.
3. Consider ways you can save and invest
Managing irregular income often means planning for periods when work is scarce. This means savings and investments are a crucial part of your financial security.
An Individual Savings Account (ISA) will be a good starting point for every saver or investor. Every adult in the UK can save or invest up to £20,000 for tax year 2024/25 in an ISA each year, with no tax on the interest, dividends, or capital gains. You can choose a Cash ISA for savings or a Stocks & Shares ISA if you’re comfortable with taking on some risk.
4. Prepare before applying for a mortgage
One of the most common concerns for the self-employed is how to secure a mortgage. But while it can be more complex to get a mortgage if you work for yourself, it’s not impossible.
Self-employed mortgage applicants are eligible for the same mortgage products as employed individuals. However, if you work for yourself you’re likely to find you’re subjected to tougher checks, especially if you have an irregular or complex income.
Lenders typically look for at least two-to-three years of accounts to assess your income. In comparison, PAYE (Pay as you earn) employees typically only need to provide their latest three months of payslips. Lenders are likely to ask to see certified accounts and/or tax year overviews (also known as SA302s).
It’s best to use a mortgage broker with experience in dealing with self-employed mortgage applicants. They can help you find lenders that are more likely to accommodate your circumstances.
Saving a large deposit and maintaining a good credit score will undoubtedly work in your favour – these both lessen the risk for lenders.
5. Think about protection products
Without the benefits of paid leave, it’s important for self-employed workers to consider financial protection products.
Income protection insurance will replace a percentage of your income if you’re unable to work due to illness or injury. This is usually long term.
Life insurance can protect your family or dependents in case of serious health issues or unexpected death. While critical illness cover will pay out a lump sum on the diagnosis of certain illnesses.
6. Don’t forget about state benefits
Self-employed workers aren’t entitled to Statutory Sick Pay (SSP). But if you can’t work due to illness, you might qualify for new-style Employment and Support Allowance (ESA). Though you’ll have to have made sufficient NI contributions.
If you’re on a low income, you might also be able to get Universal Credit. But this is means-tested so any savings and investments, and the income and assets of your partner, will be taken into account, too.
If you’re taking time out of work to start a family, you can’t get Statutory Maternity Pay (SMP) if you’re self-employed. However, you might qualify for Maternity Allowance. How much you’ll get depends again on your NI contributions – it’ll be between £27 and £184.03 a week, for up to 39 weeks for tax year 2024/25.
7. Check your credit score regularly
Technically, being self-employed doesn’t impact your credit score. However, working for yourself can make it more difficult to borrow money. This is because some lenders may consider self-employment to be risky due to the irregularity of your income.
A fluctuating income might make it difficult to make credit card and loan repayments on time. Any missed payments will affect your credit score.
Make sure you’re checking your credit score and doing what you can to keep it high like paying bills on time, tracking regular payments and keeping your credit utilisation low.
Being your own boss has its pros and cons. The freedom to choose your hours, workload, and where you work can make money management feel like a balancing act without a regular paycheck. But with some smart planning, self-employment can be a fantastic and flexible option.
Emma Lunn is a multi-award winning Freelance Journalist. She’s written about personal finance for 20 years, with a career spanning several recessions and their consequences. Her work has appeared in The Guardian, The Mirror, The Telegraph and MoneyWeek. Emma enjoys helping people learn to manage their money well, in both the short and long term.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
