Being your own boss continues to appeal to many, with 3.5 million sole trader businesses registered in the UK at the start of 2019.

Self-employment offers a range of benefits, from the opportunity to work wherever and whenever suits you to accepting as many jobs as you want or need.

However, this comes with no health insurance, no paid annual leave entitlement, no workplace pension, no sick pay or other benefits offered by an employer. Whether you are a self-employed architect, a software developer or something else, the need for independent financial advice is clear.


Retirement planning

Most employees you know will have been automatically enrolled into a workplace pension, while no solution has been found to extend this to the self-employed.

As an employer will not be paying into a pension on your behalf, saving for retirement is solely your responsibility. According to the Office for National Statistics, self-employed people aged 35 to 54 are more than twice as likely to have no pension wealth than employees.

Most self-employed people, according to NEST, recognise the importance of saving for retirement – but few specifically save into a pension. The government-backed pension provider polled 2,000 sole traders and found only 24% contribute into a pension.

Instead, 76% of self-employed respondents admitted to using other options like ISAs, property and savings accounts, although, around 74% recognised the importance of saving into a pension.

An easy way to start is through automatic contributions. If your company profits are above the relevant thresholds, then you will pay class 2 or 4 national insurance contributions (NICs), which will build up your state pension entitlement.

The state pension will not be enough to retire on though and you will need other savings to support you to have the retirement you would want. A minimum of 10 years of NICs are needed to qualify for the new state pension. In order to get the maximum state pension 35 years of NICs are required – and you need to wait until you reach your state pension age to start drawing it.

In addition to this, you could consider investing into a personal pension which would allow you to boost your retirement income. There are a number of options available, allowing you to choose how much you want to invest and when. This is beneficial as you can choose what is best suited to your personal preferences, retirement objectives and tax position.

Only basic-rate tax relief is automatically claimed. If you pay a higher rate of income tax, you will need to reclaim relief through your tax return.  Unlike the state pension, you can usually start accessing your personal pension from the age of 55, while a range of options are available under pension freedoms.

Pension contributions from the profits of a limited company can be exempt for corporation tax, while contributions paid by you as an individual should qualify for income tax relief.


Protection policies


Protecting your income is one of the biggest headaches for sole traders in the UK, and it may be worth arranging your own financial safety net.  This provides peace of mind in the event you miss out on income after becoming unwell or have an accident that stops you from working.

There are plenty of insurance products on the market, and you should be able to compile a package to replace your income if you become seriously ill or incapacitated. Three of the most common policies for the self-employed are income protection, life insurance and critical illness cover.

Income protection policies cover most illnesses and you can usually make as many genuine claims as you need over the duration of the policy.

You could also consider taking out life cover if you have any dependants, typically children or grandchildren.  Employers usually offer this as part of their workplace benefits, so it makes sense to think about setting it up for yourself.

If your business operates as a limited company, you may be able to put the cost of life insurance through your business much like other allowable expenses.

Regardless of your business structure, this is worth thinking about if you have any children or other loved ones who depend on you financially.  Typically, the person or persons named as beneficiaries of your life insurance policy will receive a lump sum or regular payments if you die, unless combined with life cover.

Critical illness cover is a long-term policy that pays out a tax-free lump sum if you are diagnosed with life-threatening conditions like cancer, heart attack or stroke. This cover can be used to pay off debts, including a mortgage loan, or to cover the costs of changes you need to make to your home as a result of your condition.  However, common ailments like a bad back or stress are not covered by this sort of policy, and it will not pay out to dependants if you die.


Tax Considerations


Being self-employed, you must proactively provide information to HMRC so that they can determine the amount of tax you owe. When you are completing your tax return, you will need to work out your expenses, as you can subtract some of these from your turnover to calculate your taxable profits.

It is important to understand that you cannot simply go ahead and subtract all your self-employed expenses. HMRC has clear rules around what you can and can’t include – those costs that you can include are called ‘allowable expenses’.

As a sole trader, you are not legally required to have a business bank account. You can use your personal bank account for all business transactions. This is because as a sole trader, your personal and business income is treated equally by HMRC for tax purposes.

However, many sole traders find it provides clarity when filing annual tax returns to HMRC. A dedicated business account also makes it easier to keep track of business finances and cash flow, whilst improving your professional image. Nevertheless, it is worth noting that business accounts typically pay less interest than personal bank accounts and do incur higher fees.

Finally, VAT registration is compulsory if your turnover is over £85,000. However, you can register voluntarily if it suits your business, for example if you sell to other VAT-registered businesses and want to reclaim the VAT. The advantages of voluntary VAT registration will vary depending on the situation and so it is vital to seek professional advice before deciding.

Much like a financial planner, who can help you with protecting your immediate and future lifestyle, a quality accountant can be invaluable too. Both will free you up with more time to run your own business and it is vital to have all of your professional advisers working together to get the most from them.


This article briefly touches on a few financial planning considerations for the self-employed. For further information on a wider array of solutions you can contact us directly.

Important information

This is solely for informational purposes and nothing in it is intended to constitute advice or a recommendation. You should not make any investment decisions based on this content.

The way in which tax charges (or tax relief, as appropriate) are applied depends on individual circumstances and may be subject to future change.

Pensions eligibility depends on individual circumstances. The value of pensions can fall as well as rise and you may not get back the amount you originally invested.

While considerable care has been taken to ensure this information is accurate and up-to-date, no warranty is given as to its accuracy

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