There were 4.33 million self-employed people at the start of this year – that’s 13% of the workforce. Research last year found that around two-thirds of self-employed workers were men, and most commonly found in construction, professional, scientific and technical jobs.
For some self-employed workers, the past few years will have been incredibly tough, as their clients cut back and trimmed costs.
But for those who’ve faced an uphill challenge in recent years, the end of the tax year offers the chance to take a few steps in the right direction, and use tax savings to help get back on track.
Meanwhile, there are those who’ve cashed in on a wave of post-pandemic spending or dramatic shifts like the boom in home improvement. Those in industries with an awful lot of job losses can also end up picking up extra work when businesses are overwhelmed after lowering their headcount.
For those whose finances are in better shape, there’s an opportunity to take advantage of some key allowances.
This article isn’t personal advice. Tax rules can change, and any benefits depend on your circumstances. If you’re not sure what’s right for you, seek advice. If you live in Scotland, different tax rates and bands will apply. Investments can fall as well as rise in value so you could get back less than you invest.
1. Get your pension back on track
Our savings and resilience tool shows that self-employed people are less likely to be on track for what’s seen as a ‘moderate’ pension income by the Retirement Living Standards – at 26% compared to 49% among employees.
It’s always going to be hard to commit to making regular monthly payments when your income can change so much from one month to the next. Some people specifically put money aside in good months to cover pension contributions in tougher times. However, if you get more consecutive lean months than you’d planned for, you should have the flexibility to pause payments.
If you do this, it’s worth revisiting your circumstances just before the end of the tax year, to see if you can afford to make up any missed months.
2. Consider a LISA for retirement savings
Higher earners will typically gain more from a pension than from a Lifetime ISA (LISA), because they get 40% or 45% tax relief going in (Scottish rates of tax differ).
However, there are others who could benefit from putting the first £4,000 of their retirement savings each year into a LISA. These include self-employed people who are currently basic-rate taxpayers and who expect to pay tax in retirement.
You’ll need to be aged 18-39, and you won’t be able to draw an income without penalty (25%) until you’re 60. But if that works for you, a LISA offers a real opportunity.
You’ll get a 25% government bonus on what you put in (up to £1,000 each tax year). But when you take the money out of a LISA, once you reach 60, it’s completely tax free. Meanwhile, after you’ve taken your 25% tax-free cash from the pension, the rest of it will be subject to tax.
Your pension is for your retirement, so you can't normally take money out until age 55 (rising to 57 in 2028). Savings outside a pension (like in a LISA) could also affect your entitlement to means-tested state benefits.
3. Use your ISA to save dividend tax
Some people who run their own business pay themselves in dividends, which attract tax once you take more than £2,000. From 6 April, the system gets even more punitive, because the allowance drops to £1,000 – and then again to £500 a year later.
Those who pay themselves in dividends might well take more than this. So if they also hold investments outside an ISA, they’re likely to pay tax on all these investment dividends.
It makes sense to invest through an ISA – or move existing investments outside of an ISA into a Stocks and Shares ISA, to protect them from tax. You can use our Share Exchange process to sell them and buy them back in an ISA.
Bear in mind though, selling investments to move them into an ISA could trigger a capital gain, which you could have to pay tax on.
4. Use your ISA to save capital gains tax
If you hold your investments outside tax wrappers like ISAs and pensions, once you make capital gains over your annual allowance, you’ll need to pay tax on them.
This becomes more likely from 6 April when your annual allowance drops from £12,300 to £6,000, and again a year later when it falls to £3,000.
If you run your own business, and you eventually plan to sell the business, or sell off any assets along the way, it could be even more of a headache in any year you make a sale. If in that same tax year you also sell investments on which you’ve made a gain, you risk paying even more capital gains tax.
By investing through a Stocks and Shares ISA, you never have to worry about capital gains on any of the investments in there. If you haven’t used your ISA allowance this year, you have a window of opportunity to use the higher capital gains tax allowance this year to realise any gains, and move assets into your ISA.
5. Use your ISAs so your self-assessment tax return is simpler
It might not seem like your biggest concern right now, but the self-assessment time of year can be a nightmare when you’re self-employed.
If you move investments into an ISA, you won’t have to hunt around for dividend payments and tax slips as the clock ticks towards midnight. By investing through an ISA, you don’t need to put details about those investments on your tax return ever again.
Self-employed? Tips to help cut your tax bill
For more tax saving tips, download our guide specifically designed for self-employed and business owners.
