If you’re self-employed, as a childminder for example, there are lots of benefits, including flexibility and independence. But you’re also responsible for managing your own finances and paying your own tax, and you may not have a steady flow of money coming in. However, help is at hand! Follow these six steps from the Money Advice Service and you’ll be well on your way to successfully managing your money.
1. Make a budget
Budgeting can be trickier for the self-employed than for those with a steady wage. But it’s especially important that you do it if you have an irregular income. Making a budget for your business expenses gives you a clear picture of where your money goes, and shows you where you might have a chance to save money. It will also help you see whether you are living within your means.
For example, if you’re a childminder, you’ll need to consider expenses such as food for the children you care for, outings, toys and craft materials. The Money Advice Service Budget Planner helps you work out what’s left after major bills.
2. Keep on top of your tax and National Insurance
As soon as you become self-employed you must tell HMRC and start paying tax and National Insurance on your income. It’s important to stay on top of all your records in order to calculate this.
To work out your tax correctly you’ll need good records of your incomings and outgoings. It will be much easier to fill in your tax return if you keep records as you go along rather than trying to find all your invoices and receipts at the end of the year. To make sure you don’t miss any payments, it’s best to pay your National Insurance contributions by Direct Debit.
You don’t have to pay National Insurance if you’re self-employed and earn less than £5,965 a year, but you can choose to make voluntary contributions to avoid gaps in your National Insurance record.
This Money Advice Service guide on tax and National Insurance gives you some more detail, including the deadlines you should know about.
Gov.uk also has a useful section on self-employment.
3. Prioritise your bills
It’s a fact of self-employed life that some months may be leaner than others. Make a list of your bills and split them into priority and non-priority debts.
Priority debts include mortgage payments, income tax, council tax and energy bills. They are the ones you must pay off first. You may find that, if you’re working from home, your utility bills can be higher because you’re at home more. Don’t forget to factor this in.
If you’re struggling to pay any priority payments, you should seek free, independent debt advice from the Money Advice Service, National Debtline or Citizens Advice. The Money Advice Service debt advice locator tool helps you find somewhere local to you.
Non-priority debts include credit card debts, overdrafts and personal loans. If you can afford to pay more than the minimum payments on these, target the one with the highest interest rate first.
4. Pay yourself a salary
It's tempting to think that all the money that comes in should be yours to do with as you please. But paying yourself a salary can help to control your finances.
Do not forget you need to set aside money for tax when you’re doing this.
If you have a better-than-average month, leave the excess in a separate account to build up a pot for leaner months. It’s a good idea to keep a separate account to act as an emergency fund. You should aim for this to have enough in it to cover basic expenses for up to six months and you should only use it as a last resort. Consider it your safety net.
5. Make sure you’re aware of benefits
It is always worth being aware of benefits you could be eligible for. It can be trickier to work this out if you’re self-employed, because of working out your earnings and hours, but it can make a difference. Charity Turn2us has a useful section.
6. Start planning for retirement
Saving into a pension can be a difficult habit to develop if you’re self-employed. The earlier you start saving into a pension, the better. It gives you more time to contribute to your fund before retirement, more time to benefit from tax relief, and more time for the value of your fund to grow.
Don’t rely on the State Pension. On its own, the basic State Pension is unlikely to provide you with anything like your current standard of living. It’s worth checking for any gaps you may have in your National Insurance record, as you may be able to pay voluntary National Insurance contributions to top up your State Pension. Find out more on https://www.gov.uk/voluntary-national-insurance-contributions
Pensions and retirement can seem a tricky subject to unpick. But the Money Advice Service guides give you a great starting point.
- Look through your last three years' income and calculate your average net income over that period. Divide it by 12 and use this figure to create your current monthly budget. If this amount doesn't cover all your monthly expenses, you will need to find a way to supplement your income or cut back on spending.
- It is a good idea to talk to a professional to find out how much tax you should be putting aside, and then put it in a separate account you don’t touch.
- It is important to consider what you would do if illness or injury meant you couldn’t work. It could be worth considering income protection insurance. You're most likely to need it if you're self-employed and you don't have sick pay to fall back on. Have a look at the Money Advice Service guide on personal insurance when you’re self-employed.