Financial planning for the self-employed: Five key areas

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by Jeannie Boyle, Executive Director & Chartered Financial Planner at EQ Investors 

Brighton & Hove has one of the highest self-employed rates in the South-East – 19%, and significantly higher than the national rate of 15%.

Being self-employed offers numerous benefits, but it also requires diligent financial planning to ensure stability and success. Without the financial safety nets of traditional employment, it’s crucial to take control of your finances.

Here are five considerations when developing your financial plan.

1) Focus on your needs

It’s easy to focus all your attention on your business’s financials only to forget about your own. Financial planning will give you space to focus on your own needs. It will help you think about your needs over the medium to long term to make sure your future self isn’t being neglected.

A financial planner will work alongside your accountant to make sure you’ve got savings, investments and pensions in the right places.

2) Protect you and your family

Employed roles usually come with benefits such as life assurance or income protection. If you’re self-employed you need to think about what will happen if you are unable to work because of ill health. There is no Statutory Sick Pay for the self-employed, which may mean a reduction or halt to your regular income if you are unable to work.

An Income Protection policy replaces a proportion of your income if you are unable to work because of serious ill health. Most policies cover mental health and musculoskeletal conditions – these are the most common reasons why people must take time off work. An estimated 17 million working days were lost to work related stress, anxiety & depression in 2021/22 (HSE 23 Nov 2023).

If you’re self-employed or a business owner, you have a responsibility to make sure that if disaster strikes, you’re leaving those you leave behind with security and stability.

As a director of a limited company, you can take life insurance out through the company. Like pension contributions, this will be an allowable expense, which will reduce your corporation tax liability.

3) Protect the business

If you are working with a partner or co-director in the business, it’s important to have a clear understanding of what will happen if one of you dies or is too ill to work. Your business should have a Shareholder Agreement which sets out the rules for running the business, including what to do if a shareholder director dies.

A shareholder protection policy provides a lump sum for the surviving shareholders to buy the shares from the deceased’s family. It means the business can continue running and your family receive the value of the work you have put into building the business.

4) Make the most of pensions

You may think of your company as your retirement plan, but this can be very risky because as you know, owning a business can be unpredictable. As a business owner you do not benefit from a workplace pension. However, as a business owner there are still very generous tax benefits available if you contribute to a pension which will help you build a secure future.

As an example, if you were to take £100 out of the business as a higher rate taxpayer, you would receive just £54 after corporation tax and dividend tax. If you contributed that £100 into a pension, the full £100 would be applied.

Furthermore, if you have been employed before it’s likely you will have company pensions through your previous employers, and it is worth reviewing and potentially consolidating these plans to keep things simple and to make sure they are invested in line with your goals.

5) When to stop?

Running a company can be all-consuming, it’s not unusual to hear entrepreneurs talk about their business as their babies. So, after all the years of hard work, how will you know when it’s time to step away? How will you know when you have enough?

Financial planning helps you articulate your own needs. It will give you an idea of how much you need to live comfortably for the rest of your life, so you have time to focus on the things you enjoy.

EQ Investors are sponsors of this year’s Human: Brighton Summit on 20 October at The Attenborough Centre for the Creative Arts.

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