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How to take control of your money if you're self-employed

Thinking about becoming self-employed? Here are our top tips on managing your finances if you want to become your own boss.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The pandemic has been a difficult time for all of us. For millions of people who already spend their lives juggling work, friends and family, their delicate work-life balance has been disrupted.

Lots of people are realising the only way to really control their working life is to work for themselves. Being in control of when and where you work helps shape a career that’s right for you.

The pandemic has been a difficult time for lots of self-employed people in particular, and the idea of going it alone right now can be daunting. But as the economy starts to show signs of recovery, the possibilities and opportunities start to bloom.

This article offers tips on managing your finances for anyone thinking about becoming their own boss, but isn’t personal advice.

If you’re not sure about an investment decision or what’s best for your circumstances, ask for advice.

Does flexibility guarantee security?

While the freedom of self-employment is appealing, it can be riskier. The past year has been a prime example, with the pandemic highlighting how important it is to have savings.

When you work for yourself your income can be irregular, so you could go long periods between being paid. To manage the ups and downs, you’ll need to be more hands on with your finances – this is where savings come in, to cushion any falls in income.

The good news is lots of self-employed people have cottoned on to this, with over half managing to save something every, or almost every, month.

These valuable saving habits have helped lots of the self-employed become more financially secure than the employed.

Being self-employed means you also need to think about the safety nets usually put in place by an employer, like life insurance. It’s also worth thinking about how you would create an income if you can’t work due to illness.

How to pay yourself well and boost your savings

Historically, self-employed men have earned more than self-employed women.

But this doesn’t have to translate to a gender savings gap. Through good financial management and savings habits, everyone can strengthen their financial security.

If you’re already self-employed or thinking about making the career change, there are a few things you can do.

Saving for the short term

As a general rule of thumb, most people should keep between 3-6 months of expenses in an instant access or easy access savings account for emergencies.

When you’re working for yourself, this should be closer to six months’ worth of expenses because of the risks that come with a fluctuating income. This will help you weather the really tough times.

Once you have an emergency cash fund, you can think about moving more savings into fixed term products. If your current savings rate isn’t beating inflation, your money will be losing value in real terms.

Find out if you’re keeping up, with our inflation calculator.

You can find a range of competitive rates with Active Savings. This lets you choose savings products from a variety of banks and building societies to help boost your emergency cash savings, all managed through an online account.

And for ultimate flexibility, we offer easy access products where you can withdraw at any time.

Withdrawals from easy access products usually take one working day.

Get more from your cash

Saving for the future

Recent studies show only 24% of self-employed people pay into a private pension. Without the security of a workplace pension, you have no choice but to take the reins in saving for your retirement.

If you’re not already paying into a pension, you might want to think about opening a private pension like the HL Self-Invested Personal Pension (SIPP). You can contribute from as little as £25 a month to save for your retirement. You won’t usually be able to access the cash again until you’re 55 (57 from 2028).

SIPPs offer low and flexible minimum contributions, usually meaning you can stop and start payments based on how well your business is doing. They also offer a wide range of investment options – which could help you get better returns.

Remember though, this isn’t guaranteed. Investments can rise as well as fall in value, so you could get back less than you invest.

If you’re a UK resident under the age of 75, you can usually pay in as much as you earn and get a boost from the government in the form of tax relief. It’s worth noting there’s an annual allowance on the amount that can be paid into pensions without incurring a tax charge. This is £40,000 for most people.

A SIPP is designed for people happy to make their own investment decisions. All investments can go down as well as up in value, so it’s possible to get back less than you put in. Tax rules change and benefits depend on individual circumstances. If you’re not sure, seek advice.

Discover the HL SIPP

For basic-rate tax payers, a Lifetime ISA could be more appealing. If you’re between 18-40 you can open one to start saving for your first home, or retirement – whichever goal suits your needs.

You’ll get a 25% bonus from the government on anything you pay in up to the £4,000 limit, and the flexibility to make early withdraws if you need to. You can also invest the money wherever you like. The catch is, if you want to make withdrawals instead of buying your first home or before you’re 60, you’ll pay an exit penalty. This means you could get back less than you put in as the charge will come off the total amount you’re withdrawing. At the moment this is 20%, but due to go back up to 25% from 6 April 2021. We think this is too high, especially at a time when so many are struggling financially. That’s why we’re asking the Treasury to reconsider. If you agree, please sign our petition.

More on the Lifetime ISA

Whichever option you choose, remember your retirement could last decades, so you need to make sure you’ve got enough to last. Not saving at all, or tapping into your retirement savings early means you could risk falling short in later life.

Want to learn more about working for yourself? Get your self-employed and business owners guide to finances.

Download guide

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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