Managing personal debt when you’re self-employed

It’s good advice to manage your finances and maintain savings for emergencies when you’re working for yourself. But this isn’t always possible when you’re starting out as a freelancer or dealing with unexpected difficulties. Fortunately, there are effective ways of managing personal debt when you’re self-employed.

The two key things to remember are that you don’t need to panic, and that pretty much every situation will be redeemable eventually. It’s difficult at times to stay calm, but as long as you start taking action, your financial situation will improve. And there are a range of organisations able to support you in reducing your debts, along with supporting your mental health and wellbeing during the process. 

Money can be a constant source of stress when you’re self-employed. And managing your personal finances may feel overwhelming if you’ve spent all day working on your business. Sometimes you may need to take a break by going back into employment, or need to subcontract to other agencies and freelancers to get back on your feet.

How personal debts impact the self-employed

There are various reasons for encountering debt problems when you’re self-employed. You may have underestimated the start-up costs, or overestimated demand for your services or products. Or you might have encountered unexpected bills, or had issues with late payments. Whether it’s business-related or not, always remember that support services aren’t going to judge you on how you accumulated debt problems.

Previous research has shown that self-employed families were nearly twice as likely to be behind with a household bill, and that it can be more challenging to access credit. And the latest IPSE research reveals 37% are incurring business debt, along with an increase in money and job-related stress.

The impact of your debts will depend on your individual situation, and whether you’re working as a sole trader or the director of a limited company. If you haven’t separated personal and business finances, or you’re liable for all business costs, then it will create more issues. But if you’re worrying about money, it’s likely to also hurt your ability to concentrate and focus on work.

Temporary issues can happen to most people, and the occasional missed payment will trigger a reminder notice, and will appear on your credit record. But when you’re regularly unable to pay bills or reduce the amount owed after settling the interest and charges, it can become classed as a persistent debt, when you find accounts suspended or closed, and you may find collections passed onto a specialist agency, or a County Court Judgement.

It's tempting to think you can just work harder to solve the problem, especially if you have family members relying on you. And this can be true for temporary issues, but larger and more persistent debt will need additional solutions, or you’re likely to increase the chance of burnout and other mental and physical health issues. A short-term fix can give you breathing room, but a long-term solution will give you financial security for the future.

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Separating your personal and business debts

Even if you’re a sole trader, it’s important to separate your personal and business finances and debts. This will help you to identify and manage your income, costs and expenses, to help you understand where problems are occurring, and how to fix them.

Along with individual accounts, take the time to set up budgets for both areas of your life. Budgeting is even more important for the self-employed, and there are a range of tools and apps to make it quicker and easier. This will let you plan ahead more effectively, and see if there are ways to cut your spending or better ways to reduce your debts than the current situation. 

Limited company directors may want, or need, to take additional funds from their business beyond salaries and dividends. But Directors’ Loans may incur tax costs for both you, and your company.

If you need to take a look at your business finances, why not check out our tips on how to save money as a freelancer.

And while limited companies have more legal separation from their business when it comes to financial matters, it’s important to understand if you’ve taken on debts with a personal guarantee. These are often required for credit such as bank loans or overdrafts, and can make one or more directors personally liable to repay some, or all, of those amounts.

Tackling personal priority debts first

If you owe money to a range of different companies and organisations, it’s important to understand the difference between secured priority debts, and other bills.

Priority payments are those which could leave you homeless, without essential services, or where there are extra powers for creditors to force payments. These should always be tackled first, whether you’re able to pay in full, or by contacting the relevant creditors about your situation.

This category includes:

  • Council tax

  • Gas or electricity

  • Rent or mortgages

  • Tax, VAT, and National Insurance

  • Child maintenance

  • County Court or Magistrates Court fines

  • Secured loans (which are taken out against your property)

  • Hire purchase agreements or logbooks loans (this could mean your transport is repossessed)

  • TV licence (if applicable)

  • Phone bills (and the internet if it’s essential for your work).

In the above cases, you can be fined, court orders can be issued, or bailiffs may be sent to your address. But even in those cases, it’s possible to still negotiate reduced payments, and some items are exempt from repossession.

Unsecured debts will still impact your finances, credit score and other areas of your life. But there are more options for how you manage these. And you can find more details on the different types of debt via dedicated organisations and charities such as Stepchange.

Options and support for personal debts when you’re self-employed

The range of debt solutions available will be largely identical whatever your employment status, but there are a few things you may need to consider before choosing a specific option to tackle your personal debts. 

  • Contacting creditors directly: It’s possible to speak to individual creditors, explain your situation, and propose affordable payments yourself. The downside is that it can be time-consuming, and isn’t legally-binding.
    Some companies will offer a payment holiday subject to terms and conditions. For example, it may be possible to take a month off from mortgage payments, and have that amount added onto the end of the term, but it’s likely to only be allowed once every few years.

  • Breathing Space (Debt Respite Scheme): Introduced in May 2021 for those living in England and Wales, if you’re eligible, you won’t be charged interest or fees on your debts for 60 days.
    You’ll still need to make regular payments if you can afford them, but the idea is that it allows you time to choose a suitable debt solution without incurring more costs.

  • Debt management plans (DMP): Voluntary agreements covering largely non-priority credit with an agreed monthly amount, although if you’re self-employed you can also include a business credit card, overdraft or loan. You’ll need to provide a record of your average earnings either by supplying bank statements or a signed report from an accountant. And you’re able to switch to self-employed under a DMP, or swap between being a sole trader or limited company.
    While you can create your own plan, it’s often helpful to work with a recognised organisation such as StepChange, who can offer advice and support, as well as manage your payments.

  • Individual Voluntary Agreements (IVAs): Originally designed for businesses as an alternative to bankruptcy, these are legally-binding agreements for monthly payments managed by a licensed Insolvency Practitioner (IP). You’ll probably be able to keep all of your assets, including any tools and equipment required for work, and you’re free to remain or become a director of a company (not the case with Trust Deeds, the closest equivalent available in Scotland). And a self-employed IVA may be designed with slightly more flexible payments due to incomes being less predictable over the typical five-year term.

  • Bankruptcy and Debt Relief Orders (DRO): You can continue to work as a sole trader or member of a partnership during a bankruptcy or a DRO, but you’re not allowed to act as a company director, or set up, promote and manage a limited company without express court permission.  After they have been discharged, this no longer applies, unless you’ve been disqualified or had a restriction order placed against you.
    And while it’s largely a fresh start from your debts, obviously it has a significant impact on your credit score and the ability to access funding. It may also limit your ability to work in specific regulated industries such as finance, gambling or private security.

  • Time to Pay Arrangements: Paying your tax each year is obviously a big part of self-employed finances, and there’s a specific option if you’re having an issue with business arrears. If your company is otherwise viable and profitable, but experiencing a temporary issue, you can apply for a Time to Pay arrangement with HMRC, allowing for a realistic proposal of settling the amount in up to 12 months (although 3-6 months is a more typical timescale)

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With all of the above options, it’s important to get qualified advice on the best solution for your individual situation. Along with accountants or other financial professionals, organisations which offer free help include Stepchange, Citizens Advice and the National Debtline.

None of them are going to judge you for the situation you’re in, and they’re all able to potentially recommend help you might not be claiming, along with repayment plans, how to deal with creditors, and more.

More support and resources for managing personal debt when you’re self-employed



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