There are many great benefits to being self-employed; from the creative freedom it gives you to its high potential for earning and time flexibility, it’s easy to understand why over 4.31 million people in the UK have chosen this path. 

With that being said, while there are many benefits to being self-employed, it’s not without its unique difficulties.

One particular challenge with being self-employed is the variable income it comes with. One month, you could earn £3,000; another month, it could be £10,000. In this article, we’ll add an additional layer of debt and address strategies you can explore to tackle debt while being self-employed successfully.  

Separate business and personal expenses 

As a self-employed individual, it’s essential to maintain a clear separation between your business and personal finances. Establish separate bank accounts and credit cards for business expenses to avoid mixing funds.

This not only simplifies your accounting processes but also ensures accurate tracking of business expenses for tax purposes. By distinguishing between business and personal expenses, you can better assess your financial health and prioritise debt repayment effectively. 

Stay calm and take action  

Being self-employed means riding the waves of variable income, which can sometimes lead to unexpected financial bumps. Whether it’s underestimating start-up costs or facing surprise expenses, personal debt can creep up from various corners.  

When navigating the whirlwind of financial stress, keeping your cool is critical. Remember, every setback is just a stepping stone to getting back on track as long as you take proactive steps. Do not hesitate to lean on support from organisations specialising in debt reduction. 

Understanding priority debts 

Not all debts are created equal, especially for the self-employed. It’s essential to prioritise those high-stakes debts, like council tax and rent/mortgages, to avoid legal headaches down the line. By tackling these debts first, you can breathe easier knowing you’re taking care of the most pressing matters. 

Debt management options 

Navigating debt as a self-employed individual presents challenges, but there are diverse avenues to explore for resolution.

Whether devising a debt management plan, considering an individual voluntary agreement (IVA), or contemplating bankruptcy, there’s a solution tailored to your circumstances.

Seeking guidance from reputable organisations such as Stepchange, Citizens Advice, and the National Debtline will provide expert assistance throughout your journey to financial stability. 

The Debt Respite Scheme  

The Debt Respite Scheme (a.k.a. The Breathing Space scheme) could be a game-changer if you’re overwhelmed by debt.

Introduced in May 2021 for residents of England and Wales, this program offers a 60-day grace period free from interest and fees on debts, giving a person in debt legal protection from their creditors.

It’s a chance to catch your breath, assess your options, and chart a course toward debt freedom without the added pressure of mounting costs. 

Tax-related financial issues 

The Time to Pay arrangements with HMRC can offer some relief for self-employed individuals dealing with tax arrears.

These arrangements allow you to propose a realistic payment plan to settle your tax debts over a specified period, giving you the breathing room you need to get back on track. 

Seeking professional advice 

Last but certainly not least, don’t hesitate to seek professional advice regarding managing your debt. Whether it’s from financial professionals or organisations such as Stepchange, Citizens Advice, and the National Debtline, a wealth of support is available to help you navigate the choppy waters of debt repayment.

Remember, you’re not alone in this journey; with the proper guidance, you can achieve your goal of debt freedom. 

Photo by Mikhail Nilov

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Mouthy Money Your Questions Answered panelist Helen Morrissey answers a reader’s question about their options when it comes to saving for a retirement if you’re self-employed.

Question: I’m 30 years old and self-employed. I don’t have a pension but would like to start saving around £250 a month for my future. Where should I start?

Answer: There are lots of personal pension providers out there so it’s worth doing your research to make sure you get the right plan for you.

Different providers will charge different fees and it’s important you understand what you are paying for and not handing over money for things you don’t need.

First let’s look at how much you can put away. You mention you want to contribute around £250 per month which is great – many self-employed people contribute on a more ad-hoc basis as their income rises and falls. If this is the case, it’s worth making sure your provider allows you to make these more irregular payments.

It’s also important that as time goes on you revisit your contributions on a regular basis and if you can increase them then this can have a huge impact on how much you end up with at retirement.

Investments are another key factor. Many people don’t feel confident making investment choices themselves and if this is the case providers will offer a default option which is designed to suit the needs of the majority of people.

However, if you have strong ideas about how and where you want to invest it is important to check your provider can meet your needs. There should be plenty of information about the options on offer on the provider’s website.

Most providers will offer you a wide range of investment options though if you want more flexibility, a self-invested personal pension (SIPP) may be a better option for you rather than a standard personal pension.

With a SIPP, you can make changes to your investments whenever you like, and you can either choose to manage your own investments or pay a financial adviser to help you.

The service you receive is also an important consideration. Pension providers will offer various tools and resources but take a look at their different offerings.

Some providers will offer a lot of tips and research into different investment options for instance which you might make a lot of use of. What kind of support does the provider offer online or over the phone is also worth considering.

Pensions are the main product people use to save for retirement but there are also other options worth considering.

The Lifetime ISA (LISA) was introduced a few years back to help people saving for retirement or for their first home. These products are available to people between the ages of 18-40.

Each year you can contribute up to £4,000 and benefit from a 25% government top up. This top up acts in a very similar way to the basic rate tax relief you get on a pension contribution so for people who don’t benefit from an employer contribution to their pension – such as the self-employed – then it’s a good option.

Added to this you can access the money from a LISA early if needed though you will be subject to a 25% penalty if you aren’t using it for house purchase or retirement. This penalty is a drawback, and we would like to see the government revisit it but if you did experience a big drop in income and needed to access the money you could do so.

This isn’t the case with a pension as you can’t access the money until you hit age 55. Another issue to consider with a LISA is that you can only contribute up until the age of 50 whereas you can contribute for longer to a pension, so this is also worth considering when weighing up your options.

Helen is a senior pensions and retirement analyst

Helen is senior pensions and retirement analyst at Hargreaves Lansdown. Prior to joining HL Helen worked at Royal London as a pensions and personal finance specialist working with the media to raise awareness of important retirement issues. Prior to this she was an award-winning journalist with 15 years’ experience of writing and editing trade publications specialising in pensions and retirement.

Photo by Ian Schneider on Unsplash

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