So you think the rat race is tough?

Go it alone in business, says Jasmine Birtles, and you're also left alone to manage all your financial affairs
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The Independent Online

Being your own boss, rather than having another person to answer to, sounds idyllic. But take the plunge and you'll realise how much easier it was working for someone else.

Being your own boss, rather than having another person to answer to, sounds idyllic. But take the plunge and you'll realise how much easier it was working for someone else.

Once you join the ranks of the self-employed you are your own mini-business, incorporating finance department, marketing, sales, production and chief executive. And organising your finances is extra complicated.

"My financial affairs are so complicated that I need as much help as possible," says self-employed political lobbyist Mark Brown. "I have a book-keeper who does my accounts each month and saves me so much in tax and accountancy fees that I would recommend it to anyone."

It is vital for the self-employed to appreciate what percentage of their income they should set aside for tax, pension, savings, mortgage and living expenses. "I would suggest that you assume about 35 per cent of your income should be set aside for tax," says Gary Morris of independent financial adviser (IFA) Towry Law. "Then you should be putting at least 10 per cent of your income into your pension. Savings should be at least 10 per cent, and you could dip into those for critical illness cover, life assurance or health insurance. Mortgage payments should account for only 6 per cent of your income, but that's assuming you have one that is three times your income."

While many advisers recommend you pay as much into your pension as possible, Mr Morris disagrees. "Remember that once your money is in a pension plan, you can't get at it until you're at least 50. So look at the way you want to live your life and consider a range of savings vehicles such as individual savings accounts (ISAs) or property. Then decide which is best for your own lifestyle."

Francis Klonowski, of IFA Klonowski and Co, believes pension provision depends on your future plans. "First, you have to determine at what age you'd like to be independent of your business," he says. "Ask yourself what level of income you would like and then work out how much you need to put in now to achieve that. This amount should then be added into your business plan as an expense. That way you can work out what your turnover needs to be each year in order to achieve it."

The self-employed have traditionally found it difficult to get a mortgage. However, as the ranks of freelancers and contract workers swell, so do the mortgage options available. Flexible home loans are useful as you can vary payments depending on how much money is coming in.

Getting a mortgage, though, is made more difficult by the fact that most people who are self-employed get their accountant to reduce their profits on the tax form as far as is reasonable. This is fine until they want a mortgage because applicants have to show a healthy profit over the previous three years. Luckily, some mortgage providers have begun to realise that a freelancer's profit statement is not necessarily the most accurate indicator of their financial status.

Although only a few financial institutions currently look favourably on the self-employed, this situation is improving. "We see [the] self- employed as a growth area," says Roland McCormack at the Bank of Ireland. "Currently, one in seven workers is self-employed, and that's set to rise to one in six. We've also noticed that freelancers are more loyal to their lenders."

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