Since the financial crisis of 2008, the ranks of the self-employed have gradually been swelling, with widespread job losses prompting people to take their futures into their own hands. Around 1 in 10 people now work for themselves, but what many fail to realise is that moving from an employed position to self-employment requires some careful financial planning. If you’re newly self-employed and not sure where to start, read on to find out.
Tip #1: Tax
People who work for themselves need to be extremely proficient when it comes to record keeping. If you take the time to keep accurate records of your set-up costs and ongoing expenditure, then you’ll find it much easier when it comes to drafting your accounts at the end of the year and calculating your potential tax liability. Remember, tax is declared on a self-assessment basis, so you’ll need to make an estimate to ensure that you’re paying the right amount to the taxman.
Don’t forget that you must also register to pay Class 2 National Insurance Contributions. As a rule, these will be deducted from your account of choice at the end of each month. You should organise payment of these when you initially notify HM Revenue and Customs that you’re self-employed.
If your business turns over £67,000 or more per year, then you need to register for Value Added Tax. Even if your turnover is lower than this, you can voluntarily register for Value Added Tax too. If you do, you will then be able to claim back the VAT on any items you buy for your business. However, if you do decide to sign up, then this will mean a lot more paperwork.
Tip #2: Mortgages
If you’re considering remortgaging or moving house, then you’ll also need to take mortgages into account. For the self-employed, options are limited, so you’ll probably find yourself restricted to a self-certification mortgage. If you have worked for yourself for a longer period and have several years of accounts to prove that you have regular income, then there is far more choice available to you.
However, before taking the plunge, be aware that self-certification mortgages are far harder to come by since the credit crunch, as they’re often considered too high-risk in the current economic climate. This has made things very hard for the self-employed who are unable to prove their income. Although some deals are still available, there is a lot less choice, fees are substantial and borrowers need at least 35 per cent of their deposit available up front.
Tip #3: Financial Solutions
As someone self-employed, you’ll find that it’s not only mortgages that are harder to come by, but financial solutions in general. You pose a much higher risk than you did when you were employed, so there are fewer bodies willing to lend to you. However, don’t despair just yet: companies like Nemo offer specialist secured loans specifically targeted at self-employed homeowners. This means that if you need money for those home improvements, or debt consolidation, you should still be able to borrow, provided the amount doesn’t exceed about 75 per cent of your outstanding mortgage balance.
Photo credit: Alan Cleaver / Flickr