Self-Employment: The Pitfalls That Could Affect Your Finances

Hundreds of businesses are started every day by people taking the self-employment route. And many entrepreneurs find success in their endeavors. However, for some, failure becomes an inevitability, and this is largely down to the financial pitfalls they succumb to.

Should you run your own business, or should you be considering the possibility, you need to keep these financial pitfalls in mind. We have listed some of them below, so take a look at our suggestions, and then research ways to save yourself from trouble.

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#1: Having no savings

It can be difficult to save money when you're self-employed. Profits can be slow to come in, so the income you do receive will be spent on taxes, bills, and any other expense that your business and personal life incurs. This is a problem, as should your business be hit with a financial emergency, you might not have the money in your reserves to get yourself out of trouble.

Of course, there is the long-term state of your finances to consider too. Not only will you need money to run your business successfully, but there is your pension to think about too. Being self-employed, you won't have an employer to pay into a pension for you, so you might face financial difficulty when you hit retirement age. 

To secure your financial position, you need to be proactive. Put as much money away as you can, even if it's very little, as this can go towards your business emergency fund and your retirement pot. And work hard at promoting your business, as by doing so, you might soon have enough money coming in to put away for your future. 

#2: Problems with taxes

Being self-employed, you are responsible for paying your own taxes. For this reason, you need to consider our suggestion above, as you will need to put money aside to pay your tax bill. If you don't have the money in place, your business will be put in jeopardy as you might face a financial penalty from your local government.

You need to make sure you're on the right tax code too. If you aren't, you might end up paying more tax than you should at the end of each year. 

And when filling out your tax forms, you might make a costly mistake with your calculations. Again, you will face a financial penalty if the HMRC later discovers you have paid less than you should because of your faulty maths, and you might also end up paying more tax than you should if you didn't calculate your expenses correctly.

So, safeguard yourself by putting money away to go towards your tax bill. Speak to an accountant for advice too, and consider handing the res of your taxes over to them when form-filling season comes around. Then read our article on taxes for further information that could help you with this tricky aspect of self-employment.

#3: Not being insured

Being self-employed, you need to take out the relevant insurance, as your bank balance will take a nasty hit if emergency strikes and you're without the right cover. We are thinking about damages to your business premises, for example, or a compensation claim from an injured customer. 

So, don't forego insurance, even if you are looking to make savings in your business. Consider the legal expenses insurance from Rhino Trade, for example, and then research any other type of insurance that relates to the industry that you are working in.

Thanks for reading!

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