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How to avoid problem debt if you’re self-employed

Posted 13 April 2016

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It is possible to avoid problem debt if you’re self-employed. Make sure you know how with today’s blog.

Are you self-employed, or thinking about becoming self-employed? Being your own boss can be the right move for some, but you need to make sure you’re prepared for the financial reality of working for yourself and that you don’t end up relying on credit to get by. In this blog, we’ll show you how to avoid problem debt if you’re self-employed. 


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Pros and cons of being self-employed

There are lots of advantages to being self-employed: the freedom to choose your own working hours, be your own boss and work on a variety of projects being just a few. You might find that being self-employed works better in your line of work or that it simply suits your personality. 

On the other hand, if you’re thinking of becoming self-employed there are downsides to consider, such as having to sort out your own taxes, not earning if you decide to take a holiday and the lack of security that an employer and a more regular income gives you. 

What you don’t want is to find that you’re not able to sustain your lifestyle and that you’re having to rely on credit to get by. Let’s have a look at how you should approach your finances if you’re self-employed and how to avoid problem debt.

Budget for an irregular income

If you really want to feel in control of your finances and avoid problem debt, budgeting is the most important thing that you can do, whether you’re self-employed or not. However, budgeting can be a challenge when you have an irregular income. Let’s have a look at some ways around this: 

Know what you need. Make sure you know the minimum amount that you need to get by every month. This way you’ll know exactly what you have to earn every month to cover your essential outgoings – to pay the rent, utilities and for food for example.

Project your income. See if you can work out roughly what you’re due to earn each month. Then you can check it against what you need to get by and you’ll know whether you need to pick up any extra work. If you can see that you’re going to earn a little extra one month, plan to use that money wisely by paying off debts or adding to your emergency fund. 

Create an emergency fund. In an ideal world everyone would have an emergency ‘buffer’ fund to cover them for the unexpected. You might find that you’re able to balance the books when everything is ticking over nicely, but do you have money to cover you if the boiler breaks down or the car or van doesn’t start? Don’t worry if you don’t have a lot of money to put into your emergency fund at first - just put in whatever you can and add to it over time. 

Create an invoicing system. Not knowing exactly when you’re going to get paid can make it hard to budget when you’re self-employed. You can combat this by setting up an invoicing system for your clients, which gives the people you work for a set amount of time in which to pay you. You should always make your terms for payment very clear whenever you agree to do work for anybody. It very important to manage your cash flow – many business go under because, although money is due to them it simply isn’t coming in when you need it to.  Don’t be afraid of asking for some money up front when you take on work too.

Consider having more than one account. You may find it easier to stay in control of your finances if you open more than one account. For example, you can put money aside for travel in one account if that happens to be a major expense in your line of work, and open another to save money towards your tax bill. 

Pay yourself a salary. One way to try and introduce some stability into your finances is to pay yourself a salary. See whether you can pay yourself the same amount each month and budget around this figure. Any extra you earn can be used to pay off any credit card debts or loans you have and, further down the line, to put into savings. 

Stay in control of your taxes

As soon as you get paid, you should be putting a portion of that money aside to pay your tax and National Insurance. How much you put aside depends on how much you earn, but the basic income tax rate is currently 20%. Making sure that you have enough put side for the taxman is a major part of avoiding money problems if you’re self-employed. 

The amount that you’re allowed to earn before you get taxed (and if you’re born after 5th April 1948) is £10,000. If you’re a high earner or your employment status is complicated, for instance if you’re both employed and self-employed, you need to check how this will affect your taxes. This Government page has a lot of helpful info. 

The tax year runs from the 6th April one year to the 5th April the next year. Your tax return is simply a form that you fill out which shows what you’ve earned and what your expenses have been throughout the tax year. HMRC can then work out from this information how much to tax you. 

If you’re self-employed, make sure that you send in your tax return to HMRC on time so that it can be assessed for the previous tax year. That’s by the 31st October if it’s on paper, and by the 31st January if it’s online. It’s important to disclose everything you need to and to return the information on time – if you don’t you could face penalty charges. Typically self employed people don’t pay income tax month (as you do via PAYE when you are employed) but will pay in lump sums once or twice a year.  You might even to be asked to pay money “on account” for income that you haven’t earned yet, which is why building up a savings account for tax is so important.

Keep an eye on your existing debts

If you have an irregular income, you need to keep a close eye on any borrowing you already have and your ability to make your repayments to avoid them becoming a problem. 

Have a look through your paperwork and work out exactly what you owe and how much you’re being charged in interest on each of them. As we said earlier, you should see whether it’s possible to pay yourself a set salary each month from what you earn and put any extra towards the debts with the highest rates of interest. Stay as focussed as you can on your debt repayment goals and aim to repay more than the minimum amount every month. 

We would always suggest that you pay off debts before you put money into savings. This is because over time you’ll be charged more in interest on your debts than you’ll earn in interest on your savings. So you’ll save yourself money by paying the debts off first. 

Can you supplement your income?

Supplementing your self-employed income with part-time employment could give you the income boost that you need, and enable you to keep on top of your debt repayments. You could take on a small part-time job for a couple of days a week and put that money aside to cover your essential outgoings. 

Before you do this, make sure you would be happy turning down some self-employed work if it clashes with your part-time job. You should also be sure that you can realistically handle the workload and that you don’t over-stretch yourself. 

A debt solution could help

If you’re worried about your ability to maintain your debt repayments, a debt solution could be the answer. Debt solutions are plans that you and your creditors agree on to help you pay your debts off in a more affordable way. Exactly how this works depends on the debt solution. 

Some debt solutions, like Individual Voluntary Arrangements (IVAs) and Debt Management Plans (DMPs), require you to put a certain amount towards your debts each month. Even though they allow you to cut what you’re paying, you would still need some sort of regular income each month to qualify for them, so this is something to consider if you’re self-employed. Some debt solutions could have an impact if you plan to become a company director in future – so you really need to chat through your options with a debt advisor.

Remember, there are experts out there ready to give you the help and guidance you need if you’re self-employed and struggling with debt. Our debt advisors will be able to assess your situation and tell you whether there is a debt solution that’s appropriate for you - just use the options to the left if you’d like to speak to anyone. 


by Christine Walsh

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