PROTECTING MY FAMILY

Help! How do I cope with irregular income?

  • 09 July 2020
  • 10 mins
  • There are more self-employed people in the UK than ever before.

  • It’s important to keep on top of your finances if your income varies from month to month or year to year.

  • And without a company pension scheme, you have might have to do more to secure the retirement you’ve always dreamed of.

At the end of 2019, the number of people officially self-employed in the UK passed the five million mark [1]. That’s about one seventh of the then working population of almost 33 million people [2]. This boom in self-employment could be down to two factors: there are those who love being their own boss and thrive on freelance work, while others have no alternative but to work for themselves in the ‘gig economy’.

The benefits

There are many positive reasons to be self-employed, or to set up your own business. For those with young children, or other family commitments, there is the opportunity to work on your own terms. For others it’s being able to work intensely for several months at a time and then take periods of time out for personal projects. Writing that screenplay, building toilets in the third world, or travelling are all possible with a more flexible lifestyle. And WiFi plus laptop mean freelance work can continue from even some remote and exotic locations.

Becoming self-employed can be a way to keep your work more varied by picking and choosing your projects. It can also make working life more straightforward because it’s possible to come in, work on a dedicated project and leave once it’s completed, without getting embroiled in ‘office culture’, which sometimes means ‘office politics’.

And then there’s the enhanced rate of pay; many self-employed projects and day rates can be very well paid, which means that the contractor often earns well in excess of the full-time employee [3].

With the smooth, comes the rough

Self-employed contractors are not the only people on irregular incomes. Those working on commission, seasonal workers, zero-hours contractors, and company directors who rely on dividends are all likely to see their income fluctuate. Especially at times like these when many client businesses are reducing their activities or closing entirely and furloughing their full-time employees.

Not being able to count on a known sum of money dropping into your bank account every month makes financial planning more challenging, especially if there can be months of feast, followed by months of famine.

And those working for themselves can lose sight of all the costs that they need to meet without an employer. Taxes, holiday pay, sick pay, IT, travel, utilities, supplies, marketing, pension provision – these are all typical expenses that someone working for themselves will have to meet from their own pocket.

This means the many self-employed people who have had to take unexpected time off work can be under a great deal of financial pressure. According to the World Economic Forum, 68% of gig economy employees have lost all their income with only 23% having any savings in place [4].

Dealing with the crisis

Not having an income for weeks on end is incredibly tough if it hasn’t been planned for. Just with any crisis, it’s important to stay calm and ask for assistance, as there is help available. The government has a Self-Employment Income Support Scheme for those affected by the coronavirus crisis and Universal Credit [5] is there as a safety net. It also makes sense to reduce your outgoings as much as possible and ask for extra time on bill payments. Most banks are currently allowing mortgage and credit card repayments to be frozen if you can meet certain conditions [6].

Planning for the income ups and downs

So, how do you try to prepare for an eventuality like this in the future?

First of all, it’s important to be realistic – everyone self-employed is likely to see their income fluctuate, so if you’re not in the 23% it’s best to think about how you could start preparing. One important step is to get a tight rein on your finances by doing your invoices and bookkeeping regularly. You need to think about having money set aside for tax payments, emergencies, periods of lower income and, in the longer-term, for your future retirement.

The safety buffer

Once you admit to needing a buffer fund, the next question is, how big should it be? This will depend on the answer to two questions: what are your usual average monthly expenses? And how much do you want to set aside to be able to sleep well at night? Three month’s spending is a good rule of thumb but it’s down to what makes you comfortable.

To work out your basic costs, add up everything that you have to pay for each month: rent or mortgage, utilities, council tax, groceries and whatever else you must have to keep you living and working. If your basics come to £2,200, aim to have around £6,500-£7,000 to hand. Of course, if you’re a worrier, or in an insecure industry, you might want to have more than this available.

Cover your real costs

As a self-employed person, you have to treat yourself as a business. As well as understanding the market you’re operating in, it’s definitely worth spending the time to work out your true costs. Because knowing exactly how much you need every job to pay you, means you are more likely to avoid undermining your business’s viability.

So, when you next work out your client’s bill, make sure you’ve covered the cost of your travel, your tax, your home office, and any other expenses, on top of your time. This could also make sure you have enough at the end of each month to cover your basics and to plan for the future.

Financial protection

Have you thought about how well you would be covered in the event of a worst-case scenario? Do you have the right kind of life insurance? Do you need health insurance? What about income protection insurance in the event of you not being able to work? Even at a basic level, this could ensure your essentials were covered if you became unwell for an extended period of time. Talking to a financial adviser could help you make suitable decisions for your circumstances.

These protection policies have no cash-in value at any time. If you don't pay your premiums on time your cover will stop, your benefits will end, and you'll get nothing back. If the benefit amount has not been paid out by the end of the selected term, the policy will end and you'll get nothing back.

Read more: Are your insurance policies up to scratch?

Making sure you can retire

As there’s no employer paying into a pension scheme for you, you need to take pension planning into your own hands and take it seriously. Are your National Insurance contributions up to date? You can check your payment history and what level of State Pensions you’d qualify for here.

Have you set up a private pension plan for yourself? According to figures from Nest, only 24% of self-employed people are saving into one [7].

Pensions are a long-term investment. The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits, which isn’t guaranteed, and can go down as well as up. The benefits of your plan could fall below the amount(s) paid in.

There are many benefits to saving into a personal pension, not least it being a tax efficient way to save: for every penny you pay into your pension, the government tops this up with a tax rebate, depending on your tax band.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

There are many benefits to saving into a personal pension, not least it being a tax efficient way to save: for every penny you pay into your pension, the government tops this up with a tax rebate, depending on your tax band.

If you have your own company, you can make qualifying corporate contributions which are an allowable business expense and can be set against your gross profits [8]. That said, for the contributions to count as allowable business expenses, you’ll have to be able to prove that the company made them ‘wholly and exclusively’ for business purposes

However bear in mind there are annual and lifetime limits on how much can be saved in a pension plan. You can find out more here.

Conclusion

Running your own company means being your own marketing, sales, HR, IT, and accounts department as well as providing a service to your clients. This can be challenging enough without having to be a personal finance genius too.

Talking to a financial adviser could help you get a better understanding of your personal situation. For example your long-term income and spending patterns. They could also look at finding ways to help you plan better for fallow times. How much should be in short-term savings, how much you can afford to put into longer-term schemes, and what types and levels of insurance you should consider putting in place.

Important information

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.

Fees and charges apply at Schroders Personal Wealth.

In preparing this article we have used third party sources which we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.

Sources:

[1] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/articles/coronavirusandselfemploymentintheuk/2020-04-24 17 April 2020

[2] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/employmentintheuk/february2020 17 March 2020

[3] https://www.freelancermap.com/blog/freelancers-employees-survey/ 9 December 2019

[4] https://www.weforum.org/agenda/2020/04/gig-workers-hardest-hit-coronavirus-pandemic/ April 2020

[5] https://www.gov.uk/self-employment-and-universal-credit accessed on 9 June 2020

[6] https://www.theguardian.com/money/2020/apr/02/loan-credit-card-payments-frozen-uk-financial-regulator-coronavirus 02 April 2020

[7] https://www.theguardian.com/money/2020/jan/11/self-employed-what-to-do-about-pensions 11 January 2020

[8] https://www.itcontracting.com/financial-services/pension-contributions-and-tax-relief-for-limited-company-owners/

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