“I’m self-employed and I’m not sure I’m going to make it out of lockdown with my finances in shape. What should I do to safeguard myself?”
If you’re self-employed or a freelance worker, this is undoubtedly a challenging time and regular income may feel like a distant memory. A recent ONS survey highlights that financial anxiety is high amongst the five million or so self-employed workers in the UK, with many either in survival mode right now, or looking for new opportunities in an economic landscape which has changed dramatically in just a few months.
As in all things though, knowledge is power, and there are a few things you can do now to safeguard your finances, giving you greater control and peace of mind.
Firstly, don’t panic
To me, this is the priority. We’re all in uncharted territory and one positive is that we’re in it together. This too shall pass and whatever you need right now, you’re not alone. Reach out for support – whether professional or for a social prop-up. We have never been closer, even when so far apart.
Look at the here and now
Are your finances in good shape, or could they do with a health check? As far as a rainy-day fund goes, it’s a bit of a downpour right now, so this may be the time to dip into any cash reserves that you’ve been setting aside. Wherever possible, avoid going into debt.
If you don’t have a contingency fund, take the time to work out how you can save when income levels allow. Drill down your income and expenditure and take a close look at your financial health. Be honest about which outgoings are necessary versus which are nice to have.
Financial and business planning focuses on medium- and long-term outcomes, but we also have to be practical with what’s going on here and now, so taking a close look at what expenditure can be realigned or stopped, even if only for a matter of weeks or months, can play a significant part in helping you to navigate for yourself and your business during this unforeseen period.
You may have personal protection in place which covers you against loss of income through sickness, illness or reduced earning capacity – this is a great starting point to review. If you don’t have this cover yet, flag this as a key area to consider once we return to some form of ‘normality’.
Pensions and investments
Should you continue with your usual payments towards pensions and investments? The short answer is ‘yes’, as these are important for your future.
That said, if the here and now just doesn’t allow, it’s ok to temporarily reduce these for a few months to give yourself some breathing space. Aim to look at them again in six months’ time, when hopefully cashflow has improved. Keep in mind that you have an annual allowance to use towards your pension each business/tax year, as well as a ‘carry forward’ allowance for up to three years. If appropriate, you could make a payment before the end of the 20/21 tax year and again in the following year/s, and still benefit from the usual tax relief enhancements. Ultimately, this means that your long-term financial plan should stay on track.
Likewise, for personal investments such as Individual Savings Accounts (ISAs), you can pay up to £20,000 in the current tax year which, again, can be done at any time before April 2021.
If it’s affordable to you, try to reduce any income withdrawal arrangements which you currently receive from your investments. This will alleviate the demand being placed on the core sum, particularly when market values are down, and will allow it to continue to work as hard as possible for you over the longer term.
Use the government grants
The Self-Employed Income Support Scheme (SEISS) provides a grant to eligible self-employed workers and members of a partnership who are experiencing income loss due to Coronavirus. The first payment round commenced in May and is open for applications until 13th July. This covers 80 per cent of trading profits over a three-month period, up to a maximum of £7,500. If you were self-employed before 5 April 2019, have filed full year tax returns for 2016-17, 2017-18 and/or 2018-19, your business income for those years was an average of £50,000 or less, and your self-employed income contributed at least 50 per cent towards your total income, you’ll be eligible.
The scheme has now been extended and a second grant will be made available in August, with a slight reduction to 70 per cent of trading profits, or a maximum of £6,750. The same eligibility rules will apply, and you don’t need to have received the first grant to be eligible for the second. You also don’t need to do anything to claim – HMRC has contacted those who are eligible with instructions on next steps.
SEISS is a grant, so you don’t have to pay it back, but it is taxable and should be declared as income in your tax return. Unlike the employees’ furlough scheme though, you can continue to work or start a new trade.
A note of caution – if you receive an email inviting you to claim the grant, do be sure it’s a genuine communication from HMRC. A number of scams are operating which attempt to mimic HMRC’s email invitation to claim SEISS so, if in doubt, contact HMRC to verify your communication before opening any attachments or clicking on any links.
You can also apply for Universal Credit, even if you are receiving SEISS or other grants/loans. Your usual income is taken into account, along with any personal savings (not business savings or money put aside for tax, which are business assets). It’s worth using HMRC’s entitlements calculator to estimate your overall benefits entitlement.
If you receive the older-style Working Tax Credit or Child Tax Credit, the situation is a little more complex, so it’s worth contacting HMRC before making any changes.
Statutory sick pay isn’t available for the self-employed, but the Employment and Support Allowance now provides support from day one (previously day eight), and the minimum-income floor on Universal Credit has been temporarily suspended. Together, these measures mean that a payment equivalent to statutory sick pay is available from the first day of illness – approximately £94.25 per week.
If you aren’t eligible for SEISS, the government offers Business Bounce-Back or Interruption loans. These are interest-free and payment-free for the first year, and can be used to cover your income. These are debts rather than grants though, so do consider these carefully as you will need to repay them in the future.
Other grants and assistance
If you don’t qualify for central government assistance, grants and business rates holidays are available in England, through the devolved governments in Scotland, Wales and Northern Ireland, and through industry-specific grants.
These have limited funds and are designed for the most in need, so the idea generally is to seek central government funding first, including loans, before applying.
The government has eased the immediate tax burden by delaying self-assessment tax deadlines until 31 January 2021. New ‘time to pay’ arrangements also mean you can defer your tax liabilities with HMRC until an agreed timeframe.
Contact your lender
Defaulting on a scheduled payment may affect your credit rating, so it’s better to arrange a repayment plan. Many banks and building societies will consider reducing or suspending mortgage, loan, overdraft and credit card repayments. Utility providers, local authorities and other lenders may also do the same. As with loans, you will still need to make up the shortfall in future months.
Without doubt, the priority during the current pandemic is health. But by being aware of your entitlements and opportunities to safeguard your finances, you can protect your mental health and wellbeing, too. Financial matters are complex and this is a fast-changing situation, so for more help, please speak to an expert.