Empowering the Freelance Economy

Self-employed: invest the extra cash coming your way

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A recent report by Hargreaves Lansdown says the financial freedom of freelancing comes with a significant financial cost. But for those freelancers that take advantage of lower national insurance and electricity costs becoming available this month, there is an opportunity to be had.

  • NI was cut for self-employed people on 6 April, freeing up some cash to close the gaps in their financial resilience.
  • Over half of self-employed households have ‘very poor’ or ‘poor’ financial resilience.
  • They have an average of £299 left over at the end of the month (employees have £336).
  • They fall short on protection, including payouts if they lose work (13% are covered compared to 71% of employees), and sick pay and income protection (33% compared to 95%).
  • Only 23% are on track for a moderate retirement income, compared to 46% of employees.
  • But excluding households with no savings, they have just over £32,000 in savings accounts, while employed people have just under £22,000.
  • They also have more in stocks and shares ISAs (£84,821 compared to £55,097 among employed people)

Figures from the HL Savings & Resilience Barometer, January 2024

“Working for yourself means you’ll have the perfect boss, but there’s a major price to pay,” says Sarah Coles, head of personal finance at Hargreaves Lansdown. “You’ll tend to earn less on average than an employed person, you won’t get any workplace benefits, and as a result, some serious gaps will open up in your financial resilience.”

The report highlights the stark realities: self-employed households have less money left over each month (£299 compared to £336 for employees) and lack crucial protections like income protection and sick pay. This translates to a worrying pension gap, with only 23% of self-employed households on track for a moderate retirement income compared to 46% of employees.

However, the report also reveals a positive trend. Self-employed people are proactive in building protection for their families, with higher rates of life insurance and critical illness cover compared to employed people. This suggests a willingness to prioritise financial security, but challenges arise due to the often lumpy income and the high cost of certain protections.

How to make the most of NI and energy price cuts

There is good news for self-employed individuals. The recent National Insurance cuts offer a financial buffer. “This is easier said than done,” acknowledges Coles, “but with energy prices dropping and National Insurance cuts kicking in this month, it’s worth considering this extra cash before it can be swallowed by any other aspect of your spending.”

Every three months Ofgem the energy regulator reviews and sets a level on how much an energy supplier can charge for each unit of energy.

From 1 April to 30 June 2024 the energy price of a typical household that uses electricity and gas and pays by Direct Debit will go down to £1,690 per year. This is £238 per year lower than the price cap set between 1 January to 31 March 2024 (£1,928). 

You are covered by the energy price cap if you pay for your electricity and gas by either: 

  • standard credit (payment made when you get your electricity and gas bill) 
  • Direct Debit 
  • prepayment meter 
  • Economy 7 (E7) meter 

The actual amount you pay will depend on how much energy your household uses, where you live and type of meter you have. However, if you invest that extra cash into a savings or investment account you could be making money on that initial investment.

The Hargreaves Lansdown report highlights the strength of self-employed individuals in building savings, so some freelancers will have already factored this “windfall”. Freelancers in general according to the report hold more money in savings accounts and stocks and shares ISAs than employed people, showcasing a commitment to financial security. This money could be accessed for emergencies or used to invest in long-term goals.

Don’t forget LISAs

For younger self-employed individuals, a Lifetime ISA (LISA) could be a good solution. “Contributions of up to £4,000 a year are topped up by a 25% government bonus,” explains Coles. “This works in a similar way as basic rate tax relief on a pension with the added bonus that you can cash in from the age of 60 or take income tax-free.” However, early access comes with a penalty, which the report argues should be reduced to further incentivise LISA use.

While the path to financial security may be steeper for the self-employed, the report offers a hopeful message. Self-employed individuals can build a strong financial future with strategic planning and the effective use of available tools like LISAs and the recent National Insurance cuts.

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