Empowering the Freelance Economy

Financial expert reveals how freelancers can maximise income

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The Cost of Living Crisis is hitting freelancers hard. Tony Clark of St. James’s Place outlines some tips on how they can best protect their income in tough times

By Tony Clark, Senior Proposition Manager, St James’s Place (www.sjp.co.uk)

Tony Clark, Senior Proposition Manager, St James’s Place (www.sjp.co.uk)

Many freelancers made the decision to be their own boss out of a desire for more flexibility, freedom and independence in their field. The ability to broaden one’s skillset and enjoy varied projects is another attractive concept. But all freelancers will share the same concern; the lack of a ‘certain salary or wage’ introduces a greater degree of uncertainty and unpredictability. Cash flow can be a key issue and one that may come under pressure at a time like now.

Rapidly rising food, energy and fuel prices have driven UK inflation up to a 30-year high of 7%,1 and with a 40-year high of 8.7% forecast later in 2022,2

Of course, even employees will have concerns, especially if the business they work for comes under financial pressure. But their employee status gives them a little extra protection – although not complete protection.

But the less certain an individual’s earnings are the more likely they will be worried about increasing costs.  Freelancers don’t have an annual pay review like employees. The discretionary spending of companies may also decrease, or they may be looking to cut costs generally. Unfortunately, freelancers often top the list of the first cost-cutting exercises and where they don’t have redundancy payments to fall back on there isn’t anything else to tide them over to the next contract.

At times of greater financial pressure, there is more of a need to juggle business and personal finances. A freelancer’s business income will often be very closely associated (both emotionally and in some cases actually) with their personal money. Differentiating between the two is often a little easier when there is a corporate structure.

With that in mind, a ‘rainy day’ fund becomes even more important for freelancers. That fund may also need to increase to cover for the current rise in living costs and to provide for tax and National Insurance Contributions (NIC).

Increasing costs for freelancers

As we continue through the 2022/23 tax year, many freelancers will be facing an increase in self-employed NIC at a rate of 1.25%. It also brings an increase in dividend taxation by an additional 1.25%. Of course, dividends are only relevant for those who run their business through a company, and this is a tax that is applied to money given to you by a company you hold shares in.

The 1.25% levy will be paid by all working adults, including workers over the state pension age – unlike other NICs. The levy will apply to class 1 NICs paid by employees and class 4 NICs paid by self-employed workers. It will be administered by HM Revenue & Customs and collected via the current channels for NICs: for freelancers, this will be through income tax self-assessment.  

Downing Street says this means a basic rate taxpayer earning the median basic rate taxpayer’s income of £24,100/year in 2022/23 would contribute £180/year, while a higher rate taxpayer earning the median higher rate taxpayer’s income of £67,100/year in 2022/23 would pay £715/year.

Class 2 self-employed NICs and class 3 NICs, which are voluntary payments made to top-up state pension gaps, are not impacted by the levy. It also won’t affect pension income. 

From 2023, this health and social care levy element will be separated out from other national insurance contributions and the exact amount employees pay will be visible on their pay slips or tax returns.

Why has the NIC rate increased?

Most UK workers currently pay NICs to fund different parts of the state benefits system – from state pensions to health and social care and unemployment benefits. The Government says funds raised by these tax increases will be legally ring-fenced to help the NHS clear backlogs, as well as resolving long-standing issues around care costs across the UK. 

How can freelancers best protect themselves?

The financial challenges we’re facing make it more important than ever that financial plans involve both pensions and ISAs to maximise available tax allowances and options.

A pension is still the most tax-efficient method for UK savers because the government adds basic-rate tax relief to contributions. This means that basic-rate taxpayers make an immediate 20% gain on their investment.

Savers into personal pensions can access their pot freely from age 55 onwards, rising to 57 in 2028. Those savers can also choose who receives their pension fund after they die, and pensions fall outside of your estate for Inheritance Tax planning.

Pensions can also have greater tax benefits, particularly if paid via salary sacrifice or limited company. 

ISAs offer tax-efficient investing, simplicity, accessibility and flexibility, which has made them a hugely popular savings option. Around £75 billion was invested in adult ISAs in 2019/20, £7.1 billion more than the previous year3.

Importantly, you don’t need to wait until you’re 55 to take money out of an ISA – you can access it anytime – so combining pensions and ISAs is a good way to plan for short, medium and long-term goals. Also, there are various types of ISA, including cash, investment (also known as stocks and shares), lifetime and innovative finance.

You don’t pay tax on interest, income or capital gains in any of these ISAs, and you don’t need to declare them on your tax return.

If there is spare money to invest then a balanced and considered view should be taken according to your attitude to risk, the need for access and taxation. Seeking professional advice here would be advantageous from a tax, legal and financial planning view.

In the case of having a large ISA portfolio, freelancers could also look to draw on the capital from investments to supplement any future short-term income shortfalls.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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