Many people become self-employed with the main aim of being their own boss. While this is an exciting prospect, it’s important to remember that you’ll have a lot more hidden costs to think about when compared to having a salary.
Make sure you take a look into some of the hidden costs of self-employment, you may find that you can’t live without the benefits you may have taken for granted when you were an employee.
You’ll have to budget for your own future
Remember, there is no employer matched pension scheme for the self-employed! You’ll have to put the money aside yourself. If you are used to this automatically coming out of your wage each month then this might be a bit of a shock. Some people decide against saving for a pension, but this is risky in the long run.
Another thing you’ll have to budget for is your short-term future. It is essential to have some savings in case you have an emergency while self-employed. Sometimes work can dry up suddenly or you may even lose a client. Having an emergency fund for times like these can help to ease the worry of having to pay your bills when you can’t.
Experts recommend around six months worth of earnings to be put aside. However, this large sum of money will take some time to save and is very tempting to dip in to.
You won’t receive the same benefits you’re used to
If you are an employee and happen to be off sick, you may receive sick pay or be able to apply for statutory sick pay if you are absent for an extended period of time.
If you’re self-employed you will receive none of this. It is good practice to budget a portion of your earnings aside to cover any days you may lose to sickness. If you have the unfortunate luck to be ill for an extended period of time then critical illness cover can be invaluable.
This will give you a pay-out if you’re diagnosed with a long term illness. It can stop your life from being turned upside down if you are suddenly unable to work. If you don’t have savings to help you get through then insurance like this might be your best option.
Tax can be tricky to work out
In a ‘normal’ job, you receive your wage with tax already deducted. It’s always a bit sad seeing how much tax is taken away, but it’s even sadder when you have to set it all aside yourself!
Throughout the year you need to set aside the right amount of tax to pay your bill. This can get pretty tricky though.
You will be entitled to a certain amount of tax-free income, up to a threshold. Once this threshold is hit, you’ll have to start putting away some money in order to pay Income Tax at the end of the year. There are also two other thresholds for National Insurance to bear in mind.
If you went to university, you’ll also need to remember to pay your student loans back. This can be tricky to work out depending on what payment plan you fall under. Ideally, if you aren’t sure what you are doing, get a trained professional to look into it for you.
It can be tempting to dip into the money you have split off into ‘tax savings’ but remember, HMRC don’t take kindly to people who incorrectly pay their tax. If you think you will struggle with this, an accountant is a great way to get advice.
Have you ever been surprised by self-employment costs? Let us know your stories and solutions in the comments below.
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About The Author
Forensics graduate-turned copywriter and blogger. I love turning complex topics into easy to understand, yet engaging pieces of content.