Contractors’ investment strategy – Cash or Stocks & Shares?

5th January 2017

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Written by: Nutmeg

The financial rulebook is different when you’re self-employed. So where should you put your money? 

Self-employment is booming in the UK. From freelance writers to start-up entrepreneurs, and Uber drivers to highly-paid consultants, the gig economy employs millions of people. 4.69 million people at the last count, to be precise. That’s 15% of the UK workforce working for themselves and that proportion is only going to get larger. 

When you’re self-employed, the way you handle money is totally different to when you’re an employee. From tax to pensions, there is a whole world of decisions and calculations you have to make for yourself – and that’s all before you even think about savings and investments. Whether you’re a new recruit to the ranks of the self-employed or a seasoned veteran considering your next move, here are some tips on where to stash your cash.

Tax bill fund: cash

The very first consideration for a freelancer is making sure you have enough money in the bank to pay the taxman. Make sure you’re not caught short when self-assessment season rolls around by siphoning off enough to pay income tax and classes 2 and 4 national insurance (NI) contributions.

The best bet to play the system to your advantage is to place the money in a high-interest cash savings account. A regular saver account is a good option – many high street banks offer up to five percent interest as long as you deposit money every month. The amount you can save is capped though, so higher earners will need a secondary pot for overflow.

Rainy day fund: cash

As the self-employed club grows larger, it is gaining greater economic and political freedom. Uber drivers won a recent victory to claim minimum wage and sickness pay – but for now it’s the reality for most self-employed people that if you’re ill, you don’t earn.

Taking out income protection insurance is highly advisable, and you should start building up an emergency cash fund as soon as you can for possible lean times. The accepted wisdom is that you need enough to cover your basic living costs for three months, as a minimum.

Pension fund: cash and Stocks & Shares

There are lots of flexible pension plans out there which are designed to suit the volatility of a self-employed income. A stakeholder pension is the simplest form of private pension. Your money is invested by default in a low-risk portfolio, and you can pause payments or adjust your contributions without incurring a penalty. A self-invested personal pension (SIPP) gives you a higher degree of freedom and control over your investments, but often involves higher and more complex fees.

If you want to supplement your retirement savings but keep the money relatively accessible, the new Lifetime ISA does the trick. This new type of account will be available from April 2017 and pays a bonus of 25 percent on your contributions, up to a limit of £4,000. You can take out the money tax-free to put down a deposit on a house, or once you’re over 60. You can easily withdraw the money before then if you need to, but you do lose the bonus and pay a five percent penalty.

Getting rich fund: equities

Once you have taken care of all these outgoings and you feel financially secure, consider using any surplus income to invest in the stock market. Equities deliver higher returns than cash in the long term, depending on the level of risk you take with your investments. 

Capital at risk. ISA rules apply. Pension rules apply.

This article is credited to Nutmeg.

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