"The Chancellor may have handed the self-employed a reprieve for now but there is no telling what is around the corner."
Anyone who has worked for themselves will appreciate just how precarious it is at times, particularly in the first couple of years. With no guaranteed sick pay, holiday or pension contributions, they can be at a disadvantage compared to those in full employment, especially if they also experience cash flow problems, fluctuating demand for services or an unexpected tax bill. Furthermore, there is no financial buffer if the business is not doing as well and this could impact their household income, including mortgage payments.
Without a stable income, some self-employed workers rely on credit for everyday household expenses, especially if they are waiting for a customer payment to come through. However, banks can see them as risky borrowers so even if they are able to get a credit card or loan, they may be forced to accept high interest rates and/or a low spending limit.
In some instances, a person’s income fails to keep pace with their business or personal expenditure and they find themselves with growing debts. Sole traders, for example, are personally liable for any debts or losses that the business makes so they can accumulate serious debts and damage their own credit score. This could make it more difficult for them to get a mortgage or loan in the future.
For this reason, some self-employed people opt to set up a limited company and separate their own finances from those of the business. Compared to a sole trader, owners of a limited company usually pay less tax through paying themselves in dividends rather than a regular salary and are not personally liable for any debts the company accrues unless a creditor has requested a personal guarantee. Banks will often request a personal guarantee for any lending to a new company.
While anyone can set up a limited company, even if there is only one person involved, it is important to remember that if the business is not profitable and falls into arrears with payments to its creditors then the company’s creditors can apply for a court judgement or statutory demand for payment, which could eventually lead to liquidation of the Company. If this happens it will clearly have an impact on personal finances, as the owner’s source of income will have disappeared.
Where personal debts are deemed unmanageable, bankruptcy is often a person’s first thought. Anyone considering it should seek professional help before embarking on this path, as there are major restrictions when it comes to running a business. Not only is it extremely difficult to get credit, it is also not permitted to run or act as director for the company without a court order.
Self-employed workers who are struggling with debt and looking to avoid bankruptcy can enter into an Individual Voluntary Arrangement, which means that charges and interest are frozen as long as they keep up the agreed repayments. During this time, they can continue running their business although obtaining credit is almost impossible. It should be remembered that anyone subject to an IVA must adhere to the repayments so should speak to an adviser if, for instance, they experience seasonal fluctuations in income.
Being self-employed has many benefits, not least the sense of accomplishment it brings when it is going well. It’s worth remembering that as well as credit cards and loans, small businesses owners might be eligible for development grants from the government or trusts. Of course, everyone should ensure that their finances are in order so there are no unexpected bills and aim to pay down debts wherever possible. The Chancellor may have handed the self-employed a reprieve for now but there is no telling what is around the corner.
