In October 2022, Statista reports there were around 4.2 million self-employed workers in the United Kingdom, equating to 13% of the workforce.

Many people appreciate the freedom you can get from working for yourself. Being your own boss means you get to manage your own time and workload, and have full control over your life.

But, against that, there are downsides to being self-employed, many of which are finance-related. These can make it stressful – especially if you’re the main breadwinner in your household.

Read about five important financial planning steps you should take if you’re self-employed to improve your financial resilience and to help secure your long-term future.

1. Make sure you have an emergency fund in place

Having an earmarked fund of money you can draw on in the event of an emergency is important for everyone. Yet, a survey reported by Aviva confirmed that a third of people have less than £600 in savings.

As well as helping you deal with sudden household issues such as a broken boiler or leaking roof, if you’re self-employed it means you have a financial safety net. It’s a sum of money you can access to cover short-term illness and periods of low or no income.

Having a readily accessible fund also means that you can take time off if you need to without having to worry about how you’ll cover essential outgoings.

Your emergency fund should ideally be three to six months’ outgoings. It needs to be readily accessible so you should set up an instant access savings account for this purpose.

Given the way interest rates have been rising recently, it’s worth checking on comparison websites such as Moneyfacts to make sure you get a decent rate of return on your savings.

2. Protect your income in the event of illness and injury

An emergency fund will cover short-term gaps in your income, but what if your earnings are interrupted through illness or injury for an extended period?

If you’re an employee and too ill to work, you should benefit from Statutory Sick Pay, which stands at £99.35 a week for up to 28 weeks in the 2022/23 tax year. Some employers will also offer sick pay in the event of long-term illness as part of your benefits package.

But if you’re self-employed, being sick usually means having to take unpaid time off work. This can have a severe effect on your income if you’re unable to work for an extended period.

Given this, it’s essential to ensure you have the means in place to provide financial protection for your family if you’re unable to provide for them.

There are two common ways of doing this:

• Income protection, set up to provide you with a regular income until you’re able to return to work or retire, if you fall ill or are incapacitated. The money you receive will help you cover essential household expenses such as your mortgage and other key items of expenditure.
• Critical illness cover that, as the name suggests, pays you a lump sum on the diagnosis of certain serious illnesses, such as a stroke or cancer.

You may also want to consider setting up private health insurance. This could enable you to access medical treatment more quickly than if you rely on the NHS. Doing so may well reduce the time you’re incapacitated and could be crucial if your fitness is key to your job.

3. Secure your financial future

The current maximum State Pension is £9,627.80, rising to £10,608 in April 2023.

Although it’s guaranteed for life, and should increase each year in line with inflation, it’s best to see this as a useful income bedrock and look to supplement it with your own personal pension arrangement.

To help you build your retirement fund, you’ll benefit from basic-rate tax relief on contributions you make up to your Annual Allowance. This means that for every £100 you pay in, a further £25 is automatically added by the government, without you having to do anything.

Furthermore, if you pay higher- or additional-rate Income Tax you can claim very beneficial higher rates of relief through your self-assessment tax return.

4. Ensure the financial security of your loved ones should the worst happen

Although it’s an uncomfortable eventuality to think about, you do need to consider how your death could affect your family financially.

Many employers offer “death in service” cover that pays out a lump sum of money to your loved ones if you die.

But if you’re self-employed it’s down to you to make the necessary arrangements to provide the peace of mind that comes from knowing your family is financially secure should the worst happen.

Simple life insurance can do this. You should select a suitable level of cover to ensure that, at the very least, all your debts – in particular, your mortgage – can be cleared if you die.

Ideally, you should also look to provide enough to enable your family to live comfortably as they make plans for the future.

5. Have a robust financial plan in place, and review it regularly

As has probably become clear to you from reading this, if you’re self-employed it’s imperative for you to plan ahead, and not leave anything to chance.

From simple savings to more detailed long-term retirement planning, a financial plan can help you achieve the financial security you’re looking for and ensure you’re effectively balancing all your different priorities.

You should also make a point of regularly reviewing your plan to ensure you remain on track to fulfil your goals, and make changes as necessary.

Get in touch

If you’re self-employed and you have any queries or concerns regarding your financial plan, then please get in touch.

You can email me at graeme@macfp.co.uk or call me on 01349 832849.