An adviser’s top financial strategies for the self-employed

There are now over 4.2 million self-employed people in the UK alone. As a self-employed professional, you're the navigator of your own financial destiny. Thats why mastering the art of financial management is crucial.

In this article, I explore some financial strategies tailored specifically for self-employed individuals, but it’s not personal advice. If you’re not sure what’s right for you, you should consider financial advice.

Budgeting brilliance

The cornerstone of financial stability for any self-employed individual lies in effective budgeting. Unlike traditional employees with fixed incomes, sole traders or self-employed people often experience fluctuating cash flows. Establishing a detailed budget, that accounts for both your fixed expenses and variable income, can help you stay on track and avoid financial pitfalls.

Tip: Consider using budgeting tools and apps to streamline this process and gain better control over your finances.

Try budgeting calculator

Business structure

It’s essential to consider the legal structure of your business and to consider whether to operate the business as a separate entity. Acting as a sole trader is the simplest structure but it doesn’t protect your personal assets. Having the business as a separate entity removes this risk but it also creates greater reporting requirements, and different taxes. Consider speaking to an accountant or a solicitor in relation to the structure of your business and whether it makes best sense to operate as a sole trader, partnership, limited liability partnership or to establish a limited company.

Tip: Choose the right structure for your business. Make sure that you have the right team of advisers around you. As the business grows and changes, re-assess whether the ownership structure still makes sense.

Tax planning tactics

Navigating the landscape of taxation is a crucial part of being self-employed. By understanding the tax deductions and allowances available to you, you can minimise your tax liabilities and keep more money in your pocket. Deductible expenses such as home office costs, professional development courses, and business-related travel can significantly reduce your taxable income. Tax planning is as important for loss-making businesses as it is for profitable businesses. If your business makes a loss, you can offset any losses against other taxable income. This can help reduce the overall tax burden and provide a cash flow relief during challenging times.

Tip: Consider consulting with a tax adviser to make sure you're maximising your tax efficiency while remaining compliant with HM Revenue & Customs (HMRC) regulations.

Renumeration structure

It’s important to consider the structure of your remuneration. If you’re a company owner, ask yourself if you have struck a sensible balance between salary and dividends

It’s also important to weigh up your salary/dividend splits, and whether a reduction in salary would have a knock-on impact on affordability in other areas of your life. For example, if you pay yourself a small salary, it could impact how much you can borrow for a mortgage. It could also impact any income related benefits that you might be entitled to.

Tip: Balancing tax efficiency with other considerations can sometimes involve trade-offs. This makes it crucial to seek guidance from your accountant or a tax adviser before making any decisions.

Retirement roadmap

Planning for retirement may seem daunting when you're self-employed, but it's essential for securing your financial future. Unlike employees with access to employer-sponsored pension schemes, self-employed individuals must take proactive steps to build their retirement pot.

Tip: Explore retirement savings options such as Personal Pensions, Self-Invested Personal Pensions (SIPPs), and the Lifetime ISA (LISA) for tax-efficient ways to save for your future. The retirement savings account that will be right for you depends on your circumstances. For example, if you’re a limited company owner and employed by your company, the most tax efficient way to save for retirement is likely to be by making employer contributions to a personal pension. Because employer contributions are normally treated as a business expense, you can offset against any corporation tax liability.

More ways to save for retirement

More on employer contributions

Pension and tax rules can change, and any benefits will depend on your circumstances. Money in a pension is usually accessible from age 55 (rising to 57 in 2028).

Borrowing company money

It’s essential to record withdrawals that you make from your company in your Director’s Loan Account. You’ll need to make a note of any payments that aren’t salary, dividends, expense repayments, money you’ve previously loaned the company or to repay yourself for personally paying legitimate business expenses. If you use a Director’s Loan Account, make sure you know the set period in which you will need to repay the Director’s loan. This will help you to prevent the company from having to pay additional Corporation Tax. Your personal tax position will depend on whether the loan is repaid or written off by the company. Therefore there may also be requirements for you to report events in self-assessment and, depending on your situation, personal tax to pay.

Tip: Consider consulting with an accountant to make sure you understand the rules in relation to using company monies and remaining compliant with HMRC regulations.

Investment intelligence

Making your money work harder is key if you’re looking to grow your wealth. While traditional savings accounts offer minimal returns, investing in diversified portfolios can potentially generate higher long-term gains. In fact, for more than 100 years and 91% of 10-year periods, investments in shares have done better than holding cash.

Tip: Consider allocating a portion of your income towards investing. Remember to assess your risk tolerance, conduct thorough research, and seek professional advice if needed to make informed investment decisions aligned with your financial goals.

Investing basics

Protecting your stake in the business

Whether you’re a new start up business, or a long-established entity, protecting the business is critical. It’s important to think about the risks to the business if something went wrong. Consider the impact on the business and your family if a key person, partner, director, member of staff, or you suffer a critical illness or are no longer able to work.

Tip: Having the right protection in place is vital for business continuity. It helps to minimise the impact should the worst happen. Make sure you have relevant liability insurance. Speak to an adviser to explore the types of protection, cover and benefits that are available and most suitable for your business, family, and employees.

The value of a financial adviser

For some aspects like complex tax calculations and doing your accounts, you’ll need to consult an accountant. But there are lots of areas where a financial adviser can add value to you and your business. Such as:

• Helping you understand your long-term financial goals and forming bespoke plans to meet them
• Extracting income from your business in a tax-efficient way
• Key person, and other protection insurances
• Developing a back up plan to reduce reliance on your business for goals like retirement