The number of Brits who are self-employed is on the up. The Office for National Statistics (ONS) reported that those working for themselves jumped a staggering 224,000 from May to July 2016 when compared to figures from a year ago. That puts the total number of self-employed at 4.76 million, now making up 15% of the workforce.
If you’re thinking about becoming self-employed, there are many financial aspects that need to be considered. Though working for yourself can certainly give you more freedom in working life, it can also come with uncertainty, especially if you don’t know where the next job is coming from.
It’s tougher to budget when your income fluctuates monthly. So whether you’re looking to get a mortgage, planning on working from home or going to use your car to get about, there are numerous elements to consider. From life insurance, income tax, income protection, mortgage, home insurance and car insurance, we’ll explain how becoming self-employed could affect you.
Once you become self-employed, you’re totally responsible for ensuring your tax and National Insurance contributions are covered. Make sure you notify HMRC about your employment status. The cut-off point is the 5 October after the end of the tax year when you’ll need to file your tax papers. The tax year runs from 6 April to 5 April 12 months after. By registering late, you could be liable for penalties. Register online on HMRC or call 0300 200 3504.
To work out tax contributions, be sure to keep invoices and receipts of all incomings (earnings) and outgoings (expenses). The tax office want to see your sales and takings, purchases and expenses. This will include cashbooks, invoices mileage for your vehicle, bank statements, receipts for purchases and your P60 if you do other work too. The HMRC will send a letter notifying you when to complete your tax return and you can do this online or by post.
Be sure to cover your National Insurance payments too. You’ll probably have to pay Class 2 (and potentially Class 4) contributions. These are to make sure you can qualify for certain state benefits such as the basic State Pension, Maternity Allowance and Jobseekers’ Allowance. Keep up with these as any late payments could make it difficult to claim in the future.
If you’re looking to buy a home and you’ve already had a mortgage approved, you’ll have to go back to the lender and explain the change in circumstance. Your mortgage offer would have been based on monthly payslips and a regular income. Unlike a regular borrower, self-employed mortgage applicants need to show up to two years’ worth of accounts. Lenders are interested in seeing your average profit, not your overall earnings. It might be best to speak to a financial advisor before you do this.
Home and car insurance
If you’re working from home, it’s important to notify your landlord, insurance or mortgage provider. This is because you may need extra cover for the type of work you do at home, and you’re using the premises for business and not just residential use.
If there are others entering your home as clients or employees, it means the risk on the home and its contents could be greater. This could mean your premium might go up or maybe you’ll need a different type of cover all together. Be sure to get cover for equipment used in and out of the home. The same applies to your vehicle – if it’s being used for business purposes, again contact your provider and be sure to have the right type of cover.
If you become self-employed, it’s important to consider what would happen if you couldn’t work due to an injury, a serious illness or if you were disabled. You won’t get get sick pay, but you may qualify for state benefit. That’s why many self-employed people choose some form of protection insurance. Critical illness could help if you got too sick or injured to work or if you got a serious illness. And if you have any dependents, it might be worth considering life insurance. You can set up this type of cover with us – if you’re interested, you can get a quote online.