4 Nov 2016
Author: Stephen Breen
Almost five million people in the UK are now self-employed, and the number is increasing every day. The reason for this growth is partly because of delivery and courier companies who classify their part time workers as contractors or self-employed. However, this practice is being examined. Last week, a court ruled that taxi network Uber must give its drivers full employment rights – including membership of the Company’s pension scheme. It may be that the ruling is applied to other workers who do similar ‘gig’ type roles before too much longer.
Those aside, there are millions who genuinely work for themselves. The Government believes that there are a number of reasons why that number is growing. These include a lack of jobs after the 2008 economic downturn, technological change that has made starting up cheaper and simpler, start-up incentives introduced by previous governments and the welfare perks of being self-employed (i.e. claiming tax credits rather than Jobseeker’s Allowance). Whatever your reason for going solo, here’s what you should know before you make the jump:
Take care with your company name
You might already have a great name in mind for your new business but it’s important to make sure there are no conflicts. If you choose the same name as another company that is currently trading, they could take legal action against you which can be extremely expensive. If you use our incorporation service, we will ensure there are no conflicts with other registered companies, although you should also do a thorough search on the web.
Invest in a pension
Employees will benefit from the new Workplace Pensions regime – but as a self-employed person, you’ll be 100% responsible for your own pension provision. It’s worth remembering that your contributions benefit from initial tax relief – so if you’re a basic rate tax payer, a £10,000 contribution effectively costs you only £8,000 after income tax relief. For higher rate tax players, the same contribution costs just £6,000. Prudential’s research shows only 12% of women who are self-employed contribute to a personal pension, in contrast with 59% of women who are employed. Around 17% of men who are self-employed contribute to a personal pension – in contrast with 60% of menu who are employed.
Experts think the self-employed should be paying up to 20% of their earnings into a pension from as early as possible. The new Lifetime Isa which will be available from April 2017 to the under 40s is also worth considering. You can save up to £4,000 a year and the Government will give you a bonus of 25% at the end of each year. There’s a maximum lifetime contribution of £128,000 – meaning £32,000 of free cash from the Government, if you save the maximum.
Be prepared for downturns
Being self-employed means your income can go up and down. You might not make as much money on some months as you do on others, and you might have unexpected expenses such as having to replace equipment. Your clients may pay you late – or not at all – and it can take months or years to resolve such issues. You may also find yourself ill and unable to work. Preparing for these downturns is essential – which means putting aside cash in an accessible account to cover your mortgage and bills, should you need it. You’ll also need to set aside money for future expenses, including tax if you expect to make a profit.
Experts recommend you have between three and six months of earnings put to one side for emergencies. Using an ISA for this fund is sensible as it offers you a decent return if you don’t have to use the money.
Expect mortgage applications to be more difficult
If you’re going self-employed or recently made the jump, expect mortgage applications to be more difficult that they were when you were employed. Many lenders insist on two or three years of accounts – while some will accept just one year. Most lenders are happy to accept form SA302 from HMRC (showing your earnings and tax paid) rather than accounts. Companies that accept just a year of accounts include Kent Reliance, Kensington and Halifax. Brokers are usually helpful in finding and applying to more flexible lenders.
Get organised and hire an accountant
Going self-employed tends to mean a lot more paperwork than you might be used to. You’ll need to save all of your invoices and receipts, and log everything using software. Waveapps is a really good programme to use for day-to-day bookkeeping – it’s completely free and has a user-friendly intuitive interface.
Unless you have some previous experience and training in doing accounts, it’s a good idea to hire an accountant – especially if you’re running a limited company. Your accountant’s fees are tax deductible and they don’t have to cost a fortune. Ask us about our low cost Company Secretarial services which including filing your annual returns.
Check your insurance
If you work from home and use your car for business, check that your insurance policies allow this use. Otherwise, your policy could be invalid if you come to make a claim. There are different levels of business car insurance, such as commuting to and from a place of work (e.g. if you are renting a desk or small office), visiting clients and transporting clients/personnel in your car.
You should make sure you have life insurance so that your spouse/partner and children are cared for if anything should happen to you. Some self-employed people also take out an income protection policy and critical illness cover. Income protection plans give you around 60 to 80 percent of your usual income until you can work again. Critical illness cover typically pays out a lump sum if you are diagnosed with a terminal illness.
As a self-employed person you may need professional indemnity insurance. This ensures you are covered if your actions cause a client financial loss or damage to their reputation due to negligent services, advice or design. Policies will usually cover the legal costs of defending any claims, together with the compensation if you lose your case.
Another type of insurance you might consider is medical or dental insurance. Dental insurance allows you to budget for the cost of treatment over the course of the year, and covers you in the case of a large unexpected bill. Private medical insurance will usually mean you are treated more quickly than if you rely on state treatment – allowing you to recover and return to work faster.
Finally, you may need public liability insurance which covers anything you are responsible for and also things that are beyond your control. As an example, if you visit a client’s home and damage something (unrelated to the service you’re providing), this insurance covers any claim they might make.
If you’re feeling rather overwhelmed, getting professional advice can help give you a clear direction. We can help with:
- Drafting partnership agreements
- Drafting your terms of business
We can work on an annual retainer or provide advice when you need it. Get in touch to find out more about our services.