Self-employment comes with freedom, but also financial uncertainty. Without employer sick pay, paid holidays or automatic tax deductions, staying in control of your finances takes extra planning.
A recent Financial Conduct Authority report found that one in ten UK adults has no savings at all, and nearly a quarter have low financial resilience. For anyone running their own business or freelancing, that’s a wake-up call. But the good news? With the right approach, it’s possible to build a robust financial buffer — even when income is irregular.
Start with a cash reserve
A good rule of thumb for self-employed workers is to build a savings cushion of six to twelve months’ essential expenses. This includes two separate pots:
- A personal emergency fund (covering rent or mortgage, bills, food, etc.)
- A business buffer (covering tax, NI, and fixed costs like software or insurance)
Automate savings by transferring a percentage of every client payment into both pots. Look for easy-access savings accounts for short-term needs and consider notice accounts for longer-term reserves.
Budgeting for tax
One of the most common financial shocks for the self-employed is the tax bill. That’s why it’s essential to set aside a fixed percentage of each payment as you go — and not dip into it.
The Self Assessment deadline is 31 January, and if your tax bill last year was over £1,000, you’ll likely need to make payments on account — meaning the first instalment for next year’s tax is also due on that date. The second follows on 31 July. Missing either could result in interest or penalties, so include both in your cashflow planning.
Make use of tax-free savings
Take advantage of tax-efficient wrappers like ISAs and pensions:
- Use your ISA allowance (£20,000 per year) to shield savings interest or investments from tax.
- Consider a Lifetime ISA if you're saving for your first home or retirement.
- Pension contributions can reduce your taxable income — and even bring back some of your personal allowance if you’re earning just over £100,000.
Protecting your income
Without employer sick pay, many self-employed people find themselves vulnerable if illness or injury stops them working. Look into income protection, critical illness cover or business overhead insurance to avoid depleting your savings in a crisis.
Make a plan, then check in. Start with simple steps: open a separate tax account, set a monthly savings target, and automate payments. Review your income and spending quarterly, and adjust your plan if business picks up or slows down.
A bit of planning now can help you stay focused on running your business — not worrying about bills.
Need help understanding how to build a financial safety net or prepare for tax season? Contact Morris Crocker today.