At the end of each month, self-employed workers have £90 less to play with than employed households and – coupled with a smaller pension pot and less sickness cover – are more vulnerable if something goes wrong, according to the HL Savings & Resilience Barometer.
Further, the average income for those who work for themselves is also 14% lower than that of standard employees, and only 21% are on track for a moderate retirement income.
The tax year ends on 5 April, and then every tax allowance and deduction is reset for 2025/26.
Whatever is earned and deducted at that point will be declared the next time self-employed workers complete a tax return next January.
‘Income can be fairly lumpy’
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “In many cases, they also have to wrestle with the fact their income can be fairly lumpy, which can make it difficult to manage money in the short term and plan for the long term.
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“The short-term squeeze is one reason why they carry such hefty debt repayments. They may plan to borrow in the difficult months and repay in better times, but this can cause all sorts of problems if things don’t improve when you expect.”
Coles added: “The interest on your debts will also add up, whereas if you were to save for the tougher months instead, the interest on your savings would be working in your favour.”
Despite self-employed workers having more savings on average than employed households (£33,720 versus £23,236) and around £30,000 more in stocks and shares ISAs, there are still gaps in how they can handle financial setbacks or surprise higher bills.
The opportunity to shield earnings from the tax collector is vital before the 5 April deadline.
Coles, alongside Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, has outlined five tips to help the self-employed before the allowances, credits and deductions are reset.
Five end-of-tax-year tips for self-employed households
1. Pension plan
It’s always going to be hard to commit to making regular monthly payments when your income can change so much from one month to the next. Some people specifically put money aside in good months to cover pension contributions in tougher times.
However, if you get more consecutive lean months than you had planned for, you should have the flexibility to pause payments. If you do this, it’s worth revisiting your circumstances just before the end of the tax year, to see if you can afford to make up any missed months.
2. Lifetime ISA for retirement pot
Higher earners will gain more from a pension because of the extra tax relief, but if you’re self-employed, you’re a 20% taxpayer, you expect to pay tax in retirement, you don’t need to access the cash until the age of 60, and you’re currently aged between 18 and 39, you may want to put the first £4,000 of retirement savings each year into a Lifetime ISA (LISA).
You’ll get the same tax relief going in, but when you take the money out, once you reach the age of 60, all the money coming out of a LISA is completely tax-free, whereas only a quarter of the money coming out of the pension is. You won’t necessarily pay tax on all of the rest, but you’re likely to pay tax on some of it.
3. Dividend tax
Some self-employed people pay themselves in dividends, which attracts tax once you take more than £500. Those who pay themselves in dividends will bust their dividend allowance almost immediately, so if they also hold stock market investments outside an ISA, they’re likely to pay tax on their dividends.
It makes sense to invest through an ISA – or move existing investments into a stocks and shares ISA using the share exchange (or Bed and ISA process) to protect them from dividend tax forever.
4. Capital gains tax
If you hold your investments outside tax wrappers like ISAs and pensions, once you make capital gains over your annual allowance of £3,000, you’ll need to pay tax on them. This becomes more of a risk as life goes on and your investments grow.
If you’re self-employed and you eventually plan to sell the business, it could be even more of a headache if, in the year you sell up, you also make investment gains, and risk paying even more capital gains tax. By investing through a stocks and shares ISA, you never have to worry about capital gains on any of the investments in there.
5. Save ISAs from self-assessment tax return
Never again will you have to hunt around for dividend payments and tax slips as the clock ticks towards midnight. By investing through an ISA, you don’t ever need to put details about them on your tax return ever again.
