Pensions

Self-employment: The challenges and how to overcome them

by Madaline Dunn

In the UK, there are over five million self-employed people. This figure has risen dramatically since the 1970s when only a small fraction of the workforce (8%) were self-employed. 

Of course, the trend towards self-employment stems from increased flexibility, greater creative freedom and the ability to be one’s “own boss”. However, that’s not to say that there aren’t challenges that come with the decision to break away from “traditional employment”.

At The Salary Calculator, we’ll guide you through the challenges and potential pitfalls of self-employment and how to overcome them.

This article will explain:

  • The additional responsibilities that come with self-employment
  • The differences in maternity pay and parental rights 
  • How to manage finances 
  • The importance of good time management

What are the additional responsibilities of self-employment?

While self-employment can provide workers with a lot more freedom, there are additional responsibilities that individuals must fulfil when they go solo.

One particularly important responsibility is registering as self-employed with HMRC. Following this, self-employed professionals (whether sole trader, limited company or partnership) must complete a yearly Self-Assessment tax return and pay National Insurance (NI) contributions and income tax on profits earned. Additionally, self-employed individuals must still pay income tax and NI contributions even if they make a loss.  For help with calculating how much you owe HMRC, head over here.

Another responsibility for those who are self-employed is setting up a pension pot in preparation for your golden years. While employers must provide eligible employees with a workplace pension scheme and make contributions, self-employed people must choose their own pension plan. That said, only 31% of self-employed individuals are currently saving into a pension!

Most self-employed people opt for personal pensions, and there are few different types. These are:

  • Ordinary personal pensions
  • Stakeholder pensions
  • Self-invested personal pensions 

Some self-employed people are even eligible to use NEST (National Employment Savings Trust).

Of course, if a self-employed professional makes at least 30 years of NI contributions, they are entitled to a state pension. However, this is only £179.60 per week.

Setting up business insurance is also another factor that self-employed individuals should consider. Professional indemnity insurance and public liability insurance are the most common types chosen by self-employed people.

What are the differences between maternity pay and parental rights?

Maternity pay and parental rights work slightly differently for self-employed people. Unfortunately, when self-employed, you aren’t eligible for maternity leave or typical maternity pay.

That said, instead, you may be eligible for Maternity Allowance (MA). Eligibility depends on whether you can fulfil the following criteria in the 66 weeks before your baby’s due date:

  • You have been self-employed for at least 26 weeks
  • You have earned (at least £30 a week in at least 13 weeks – not necessarily in succession

The total amount that a self-employed mother can earn is £151.20 per week, which is reduced to £27 a week for 39 weeks if there are insufficient Class 2 NI contributions.

Unfortunately, there’s no equivalent for fathers and partners who want to take time off.

Managing finances 

Unfortunately, when it comes to self-employment, there are financial challenges that you will face that other workers do not have to worry about. When you’re self-employed, you are in charge of your finances, so this means you’re responsible for:

  • Creating a business budget
  • Establishing a business bank account
  • Reviewing your finances
  • Consulting an accountant (if you feel the need to do so)

It’s also essential to check what you can claim in allowable expenses because this can save you a lot of money. Equally, due to self-employment being a bit more financially precarious than traditional employment, it’s wise to have some contingency money saved up.

By making sure you tick all of the above boxes, you’ll have less chance of facing financial struggles and avoid a lot of potential stress! 

It’s also important to note that it’s not the end of the world if you do come into financial difficulties. For example, if a client or customer fails to pay for the services you’ve delivered, there are steps in place for you to follow.

With late payments, you should immediately send a collection request. If this goes unheard, it’s a good idea to send a “statement of account” to the accounting department. This should include:

  • The invoice date and number
  • The amount owed
  • The work completed for which the owed

Often, late payments are just a mistake, but if no payment arrives within 30 days of the due date, the Late Payment of Commercial Debts Act has your back. This piece of legislation outlines that self-employed workers can claim interest and debt recovery costs set at the Bank of England base rate, plus 8%.

The importance of good time management 

In order to ensure business success, self-employed workers must ensure that they have top-notch time management skills. To achieve this, there are a few helpful hints and tips you should follow.

Schedule your time well. Whether that’s selecting a time to deal with admin, plan contingency periods, or even free time, carefully planning your time will help you avoid stress and multitasking. 

Additionally, while it’s important to have a business email and a personal email, it’s also crucial to have set times to review your emails. Time-tracking can be helpful here, and there are plenty of apps out there that can help you with this.

Another way of achieving good time management is through outsourcing. Delegating tasks that you don’t have the time to complete can boost productivity and give you time to focus on tasks you have prioritised.

 

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Monday, June 28th, 2021 Jobs No Comments

None of the content on this website, including blog posts, comments, or responses to user comments, is offered as financial advice. Figures used are for illustrative purposes only.

Changes to pensions in 2021

by Madaline Dunn

The new tax year brings with it some significant changes to finances. One area affected is pensions. 

It’s important to keep in the loop about pension changes because it can mean that either your finances take a hit or you potentially see a boost!

At The Salary Calculator, we’ll make sure you’re up to date with all the latest information. In this article we’ll explore:

  • What annual allowance is
  • Whether any changes have been made to pension tax relief
  • What changes have been made to lifetime allowance (LTA)
  • Whether state pensions have been boosted
  • How employer contributions work

What is Annual Allowance?

Annual allowance refers to the total amount of pension contributions an individual can make each year while receiving tax relief. This includes contributions made by the individual, employer, and any other third party.

The annual allowance is capped at £40,000. If you exceed this amount, you will be taxed at the highest rate of income tax that you pay.

The Tapered Annual Allowance (TAA) was introduced back in 2016 and applies to high earners. For the tax year 2021/2022, the limit for threshold income and adjusted income is being increased to £200,000 and £240,000, respectively.

Are there any changes to pension tax relief?

Pension tax relief is applied to any governmental top-up contributions made to your pension.

If you are eligible for pension tax relief, the amount of relief you will receive is determined by the highest rate of income tax that you pay. So:

  • Those who are basic-rate taxpayers receive 20% pension tax relief
  • Those who are higher-rate taxpayers receive 40% pension tax relief
  • Those who are additional-rate taxpayers receive 45% pension tax relief

Those who earn under the Personal Tax Allowance (£12,570) are not eligible for pension tax relief.

No changes have been made to pension tax relief.

What are the changes to Lifetime Allowance (LTA)?

When it comes to pensions, the good news is that you can save as much as you want for your golden days. 

The amount of money you accumulate from all pension schemes in a lifetime before taxation is called your pension lifetime allowance (LTA). This was introduced back in 2006, and from 2021 through 2022, the LTA is £1,073,100.

In March, it was announced that LTA would be frozen at this limit until 2026, and it is estimated that the Treasury will generate £990m from this freeze.

Of course, LTA does not apply to everyone. An individual can work out whether or not it is relevant to them by calculating the expected value of their pension payout. To make this calculation, head over here.

If your pension pot exceeds the LTA, you will be charged 25% if it’s withdrawn as income. Alternatively, if it is withdrawn as a cash lump sum, it will be taxed at 55%.

Have state pensions been boosted?

In line with the triple lock ruling, state pensions have been boosted. On 6 April 2021, the state pension increased by 2.5%. That’s an increase of £4.40, bringing the weekly total to £179.60. Annually this works out as £9,339.20.

That said, you will only receive the full state pension amount if you have 35 years of National Insurance (NI) contributions.

Those who reached the state pension age before 2016 will receive the basic state pension, which is slightly less and boosted from £134.25 a week to £137.60.

How do employer pension contributions work?

In line with the Pensions Act 2008, an employer must offer a pension scheme to eligible employees and automatically enroll them once they have commenced employment. Employers must also make contributions to their employees’ pension scheme.

Currently, the minimum amount that an employer must contribute is 3%, and this has remained unchanged.

 

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Monday, May 10th, 2021 Pensions No Comments

New tool for those thinking of retiring

by Admin

If you are thinking of retiring soon, you might be wondering what kind of effect taking your pension would have on your take-home pay. This is not quite as simple as it might sound at first – the deductions from your pension income will not be the same as those on your salary. For example, you might be paying into a pension with some of your salary, which of course you would not do with income from a pension. And National Insurance is not deducted from pension income, whereas it is deducted from your salary if you are below state pension age.

With this in mind, I have combined a few options from the Two Jobs calculator (which shows you the take-home pay if you have two income at once) and put them in the Two Salaries Comparison Calculator (which compares two incomes side-by-side). Now, you can enter different options for the two different incomes you are comparing (e.g. different bonuses or overtime) – and you can also tick a box on the “Additional Options” tab to indicate that one or other of the incomes is a pension. This income will then not have National Insurance deducted from it – so you can enter the details of your employment for the first income and the details of your pension in the second income, tick the box to say the second job is actually a pension, and the calculator will deduct NI only from the first income.

If you are thinking of retiring, or just investigating a new job which would have a different salary and different deductions, try out the Two Salaries Comparison Calculator.

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Receiving a pension AND employment income

by Admin

The Salary Calculator has had the Two Jobs calculator for a little over a year now. I have had a couple of people contact me and say that they haven’t been able to use it for their situation, which is that they are receiving one income as a pension but they have a second income from a job. The pension doesn’t have National Insurance deducted from it but the job does, and it wasn’t possible to reflect this in the calculator. However, this oversight has now been fixed!

On the Two Jobs calculator, the Additional Options tab now has two extra tick-boxes which you can use to indicate that either the first or second job is a pension (or indeed that they are both pensions). The calculator will then not deduct NI from the job that you say is actually a pension. On all other calculators, where you are only dealing with one income, you can just tick the “I do not pay National Insurance” box if this actually a pension.

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New pension options

by Admin

A while ago, I considered adding an option to the calculator allowing you to enter the amount in £ that you contribute each month, rather than the percentage. I thought this would be useful for people whose employers didn’t use their salary as the basis for the pension contributions but instead “pensionable pay” or something similar. I never got round to it because I thought it was too much of a niche and would make the calculator too confusing. However, the current Coronavirus situation with people being put on furlough made me realise that more people would be affected by this than usual, so I have added this option.

I had an email from a visitor to the site who said that his pension contributions in furlough were based on his full salary, not his reduced, furlough pay. As such, the percentage he was entering was giving the wrong deduction when applied to the reduced pay. To combat this, I have now added the option to switch from a percentage input to a £ input. Enter the amount you contribute, choose the pay period, select what kind of pension you have, and then the calculator will use this amount as your pension contribution. To make this even easier, on the Furlough Calculator you can enter the percentage as usual but tick the “Don’t reduce pension” option, in which case the calculator will automatically apply the pension contributions from your full salary to your reduced salary.

People who contribute to a personal pension (i.e., not through their employer) might also find it easier to use the £ amount option, as it may be easier than calculating the percentage.

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Wednesday, May 20th, 2020 About The Salary Calculator, Pensions No Comments

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