While the highs of being your own boss are plentiful, self-employment also comes with some downsides. Most notably, taxes.
As a full-time employee, you barely have to think about tax. It’s taken out of your payslip via PAYE (pay as you earn), so as long as you’re on the right tax code you shouldn’t have to keep any aside for the tax man at the end of the tax year.
But when you’re self-employed (either as a sole trader or director of a limited company), your taxes are your responsibility.
Not self-employed? Try our free salary calculator to work out how much you’ll take home each month
So how much should you put aside? Sadly there’s no definite answer, but it always pays to err on the side of caution. If, for example, you put 40% of all your income away, you should find there’s more than enough when it comes round to self-assessment time. Any money you have left over after paying your taxes could be put towards a pension.
However, for most people – especially those just starting out – the thought of putting nearly half away might seem unrealistic. The good news is that you can probably get away with putting away a bit less; the bad news is that it’s impossible to provide an absolute minimum. As a guide, though, if you put 30% aside you should still have enough to cover your Income Tax responsibilities and National Insurance Contributions (NICs).
Whatever you do, make sure you put the money away – ideally as soon as you’re paid by a client. Leave it in your current account and it’ll be far too easy to accidentally spend it. And if you find your a long way short when it comes to paying your taxes, don’t expect HMRC to be sympathetic.
