1 BEAT THE TAXMAN
One in seven of the UK working population is now self-employed. One of the big benefits of working for yourself is the ability to optimise your affairs to reduce your tax bill.
Consider paying yourself a lower base salary and topping this up with dividends to reduce income tax. If there’s capital that’s surplus to your requirements keep it in the company rather than extracting it unnecessarily, especially if this will push you into a higher tax bracket.
2 PLAN FOR RETIREMENT
Becoming self-employed or starting out as a contractor means that you will not have access to an occupational pension scheme; you will have to make your own provision. Although you will not benefit from contributions from a third-party employer, there are tax breaks that should encourage you to fund a pension. Making pension contributions out of the capital in your own company will reduce corporation tax and move capital from your company into a pension in your own name. Review existing pensions and undertake robust analysis to see how much you need to contribute to secure your desired level of income in later life.
3 REPLACE DEATH-IN-SERVICE
One major benefit often given up when leaving employment to embark on self-employment or contracting is death-in-service benefit. This can be replaced with life cover. To ascertain the level of cover you need think about short- and long-term capital requirements of your dependants, liabilities that need repaid on death (such as a mortgage) and any existing cover.
4 COVER YOUR INCOME
If you were to fall ill how would your family cope financially? What fixed monthly expenses do you have that would still need to be met? What expenses could be trimmed if your income ceases? Income protection is insurance that typically pays up to 60 per cent of your gross income tax-free after a selected period of time until you return to work, retire or die. It is a long-term insurance policy and allows you to claim as many times as you need to for as long as the policy runs. Rather than replacing any lost benefits on a like-for-like basis look at how much cover you actually need and for what length of time before scouring the market for the best deal.
• Evan Duffus is a financial planner at Acumen Financial Planning