Financial considerations for the self-employed.

Working for yourself can present some attractive benefits such as your working hours giving you the opportunity to fit work around family life, how your work is done and most importantly, the earning potential of your business.

While many like the freedom of being self-employed, there is also a feeling of added pressure. Being employed by someone can provide you with a sense of security compared to being self-employed where you have to be in control of everything to ensure your business runs smoothly and successfully. The financial instability of running a business is often the primary downfall for many business owners, as the need for organising everything from insurance through to complying with tax and other regulations can often prove quite complex.

When you run your own business, you can take out business insurance. This will act as a financial safety net in the occurrence that your business suffers from loss due to an unforeseen event. There are many different types of business insurance that range from legal liability and employee-related risks through to property damage. 

Another important factor to consider is your tax. It is your responsibility to ensure that you pay your tax correctly, as getting behind on tax payments can quickly have a detrimental effect on your finances. Tax regulations often change and it is vital to ensure you keep up to date with any changes to ensure you are on top of all of your tax payments. 

Salary/dividends/pension

A potential benefit of drawing dividends from a company is that they are not subject to National Insurance deductions, unlike salaried income. In addition, as you are in control of your own finances, you can decide when to declare company dividends e.g. you may want to postpone taking a certain amount of dividends until a future tax year. Of course, each strategy may have a balance to take into consideration, in this case, dividends do not count as 'relevant UK earnings' in assessing your annual pension allowance and therefore could reduce the amount you can contribute to a pension each year. However, if you own a limited company and you are a director and therefore an employee of the company, the company can make contributions on your behalf, potentially up to your full annual allowance. 

Most self-employed people use a personal pension for their pension savings. The provider will claim tax relief at the basic rate of tax on your behalf and add it to your pension savings. Any additional tax relief available can then be claimed via your tax return. A pension can also be very cost effective giving you tax relief on your contributions and/or a business an expense that can be offset against the profit thus saving corporation tax.

There are many aspects to take into consideration when starting your own business and it can be an exciting as well as a daunting time in equal measures. Taking financial advice at such a time to help guide you through the most tax efficient and potentially profitable ways in utilising the opportunities that are available in a strategic manner commensurate with your objectives could prove to be as good as a decision as becoming self employed itself.