Telegraph request: How to financially protect yourself if you are self-employed

There is zero fallback that employees rely on when you are self employed.

That means you have to build your own, starting with clarity over your finances.

Keeping business and personal money separate is essential. A dedicated business account shows what you truly earn and what you can safely take, reducing stress in quieter months.

Tax should be set aside as soon as you’re paid, payments on account catch people out because the money was never really yours.

A savings buffer is just as important. Even with my own personal circumstances, I use accounting software Xero, which keeps everything in order. It is a constant reminder to stay on top of finances. I would still recommend three to six months of essential costs, minimum.

Most importantly, protect your income. If you’re ill long-term, your income usually stops and the state support available is minimal. Income protection keeps your mortgage, bills and lifestyle covered when there’s no sick pay or employer support.

If you are self employed - YOU - are your business. If you dont have income protection in place, you are hugely risking everything that underpins your life. Mortgage/rent/bills/food/clothes. Its not worth skipping what is a relatively small monthly payment because you think it wont happen to you.
If it happened and you were not covered, you could always just quit the very thing you set up with your blood, sweat, dreams and passion, before you end up back on the job line working towards someone else's dreams?
Look after you.

Both men and women who are planning to have a child need to think ahead financially, particularly if they’re self-employed. Unlike employed parents, there’s no enhanced maternity or paternity pay safety net – and any statutory support is minimal – which means most families have to proactively save if they want time off with their baby.

Self-employed women may be entitled to Maternity Allowance, but this is significantly lower than most salaries and often isn’t enough to cover everyday living costs. Meanwhile, self-employed dads-to-be don’t receive any statutory paternity pay at all. As a result, parental leave for the self-employed relies almost entirely on forward planning – building savings, modelling reduced income, and creating a realistic financial buffer well before the baby arrives.

For most sole traders in the basic rate tax band, a sensible rule of thumb is to set aside around 30% of profits for tax. This helps cover tax and NI and provides a buffer if the bill is higher than expected. In the first year of trading, this is especially important, as payments on account mean you may need to pay an additional 50% of that first year’s bill upfront.

Having a separate business bank account is one of the simplest but most effective steps a self-employed person can take. It keeps finances clear, makes expense tracking far easier and removes a lot of stress when it comes to preparing tax returns.

Working with an accountant can prevent costly mistakes, ensure all allowable expenses are claimed and give reassurance that everything is being handled correctly.

With MTD on the horizon, early preparation is key. Using accounting software now not only supports future compliance but also gives real-time visibility over profits and cashflow.

"That Money Isn't Yours Until Tax Is Paid"
The biggest mistake self-employed people make is treating their gross income as spending money. Every pound that hits your account will attract the taxman's interest. Set aside 20-25% immediately for tax and payments on account. This a non-negotiable discipline, not optional planning.
And while you're ringfencing money that isn't really yours, start protecting your future self. Even £100 monthly into a pension becomes £50,000+ over 30 years through compound growth and tax relief. You've lost the employer contribution goldmine, so starting small beats starting never. Your 67-year-old self will thank your current self.

Being self-employed can offer flexibility and control, but it also means taking responsibility for your financial safety net. Key considerations include:
Plan for the unexpected - insurance such as income protection can help provide a replacement income if illness stops you working.
Plan for your future self - pension contributions benefit from tax relief and can help you to build long term financial security.
Plan for time off - holidays, parental leave and sickness can all result in no income, factor this into your planning.
Build an emergency fund - to help manage income dips, late payments or unexpected costs.
Don’t forget about tax - if you’re self-employed, you’ll pay tax through self-assessment, so it’s important to set money aside.
Work with professionals - accountant and financial planners can help you avoid errors, manage tax efficiently and plan for your long term goals.
Investments can go down as well as up and tax treatment depends on individual circumstances.