Saving % of income for tax/training/pension - how do you manage?

[mintchocchick]

I am newly self employed (since last October) and work a very variable amount each month, sometimes earning £400/500 and sometimes earning £2000, average is about £1200 monthly. We have high outgoings, mainly mortgage so we always need all my income to go into the household account and there is none left for saving for my tax return, any professional training or a pension. So I have no pension which worries me and I'm getting bit worried about my first tax return.

I suggested to my DH that I save 20% of my income every month, no matter how much we need the money, because it seems like bit short-term craziness to NOT save for these things.

How do other self-employed people organise their income/savings?

Firstly tax - if you are taking all the income and putting it into the household account then you are spending money that is not really yours. You MUST make sure that you put money for tax into a separate account. Either a percentage of the earnings every month, or a much larger lump sum when your monthly income is higher. Take the advice of an accountant about how to manage you tax, don't risk getting it wrong.

How much do you NEED to contribute to the household account / bills? If on average it is £1,200 and your average income (before tax) is £1,200, then you are not bringing in enough money to cover your costs and pay your tax, so you need to increase your income or cut your costs.

Training / pension contributions are both important, but in my first year of business I put nothing into these. I reviewed income / outgoings / cash flows after one year, and then established a plan for each of these (regular payments for pension, more ad-hoc funds for training).

Thank you Venus.

We have recently moved house so a lot of my income over the past 6 months has been gobbled up with surveys, electrician, decorator, paying off rental house utilities etc. So we should not need the full amount once we get ourselves straight - which I'm hoping will be start of July.

I'm just not sure what % to save - does 20% sound a good start?

I take your point about not worrying too much about training/pension - I think I will get us over this hurdle, start off a system of saving tax, find an accountant and tackle the training stuff next year.

Pension. Nope, don't have one. ISAs and equity in house but no pension. Don't trust them.

Training - depends how much you feel you need.

Tax - despite best intentions, a good proportion of taxpayers pay last year's out of this years - just work out your profit on a quarterly basis and try to put 29% of that aside for tax and class 4.

Accountants - have a look at my ebay me page. We can generally save you more than we charge !

Agree that you need to save the tax each month. And then work towards having pension payments as a year 2 thing.

As an aside I personally think pension payments are important for women - esp if your DP is paying into his - (although I do share talkins ), typically we are working the flexible jobs, which mean less money and less payment into a pension. What happens if it isn't us and current DH living happily every after on our pensions....

Re money. We try to work out what is the min we can live on and then other income go towards extras but deciding each time where to spread it. We found we were still living like I was earning a salary, so cut right back and althought not as fun it means we are living within our means.

My DH can be very anal about finances which is helpful. And I'd always try to talk in terms of net money in. I think it can give a sense of wealth when you say "I am earning £1000 from client x", when actually take home is c£700 based on 30% saved.

I have an accountant, I think it is money well spent.

Depending on your area of work, there are sometimes free/cheap networking events that have some learning content. I always fight for some money out of the income to spend on the business.

Not sure if that helps.

Good luck.

I'm a basic rate tax payer so I save 20% of every payment that comes in for tax. It shouldn't be enough, because you do pay more than 20% between tax and NI, but by the time I've written off expenses (everything from share of utilities costs to professional association dues) I generally have plenty for the tax bill and sometimes have money left over.

Same as Tantie. But I have nothing left over to put into a pension, which worries me. Mine was worth, last time I checked, about £700 per year Not sure where to start, tbh - if you can't afford to put money into a pension, what on earth can you do? Apart from hope to get better-paying work fingers crossed

I do not plan to retire.
And I do have ISA savings, some pension, DH well insured and capital in the house.
But in my game, people tend not to retire, we just work a bit less each year as we get older.

Set aside money from every single invoice for tax. I put 33% aside for that. The rest is used to support the family.

I try and make sure I have enough in one account to pay a few months child care.

I've just bought a place and need to work out how to ensured there is enough cash to pay the mortgage each month. Previously I've paid rent 6 months in advance.

Thank you to everyone who replied. I have a plan now to save 20% of every payment and not see it as 'my money.'

As with other aspects of being self employed you have to be very self disciplined to make it work- I hadn't really appreciated that when I first started but I'm hoping it will become easier over time. Maybe this sort of thing becomes routine eventually.

I also put by 33% of every invoice. It more than covers me, but it's nice to have a bit of a buffer. I also do what Zoelda does - make sure I have a few months of childcare, in case things go quiet, I need my money to at least cover childcare (at worst case).

At the moment i do not put anything away apart from for tax. One day if I can ever afford it I will put some away for retirement.

Is 20% the actual figure or is it a guess? Does it include making up the shortfall as you havent put aside anything before now and national insurance? Come next Jan you will be paying it all so better to be organised now and don't forget your tax free allowance as well it might not be to bad.

Basic rate tax is 20%. Class 4 NI is 9% but once personal allowance and complete overheads have been taken into account, 20% is about fair.
personally I aim for 15% - but then I've been playing HMRC at their own game for a very long time.