Planning begins at home

Self-employment brings freedom from the office but needs organisation, says Tom Tickell

At least five million people work at home. More than half of them earn over pounds 35,000 a year - and one in five make pounds 80,000 or more, according to CGU, one of the main insurers. Drive and enthusiasm are vital. But before you get to that stage, you need to be well organised.

Tax

You must notify the Revenue as soon as you go self-employed. This will trigger payment of flat-rate Class 2 National Insurance contributions. Paying these will qualify you for incapacity benefit, the state pension and, for women, the widow's pension and maternity allowance. You will also have to pay Class 4 contributions on everything you earn from pounds 7,530 to pounds 26,000. Those with a turnover of pounds 51,000 or more have to register for VAT.

If you are self-employed, you can claim all expenses incurred "wholly and exclusively" as part of your business. So you can spend money linking up to the internet, installing extra lines, producing promotional leaflets, travelling to conferences or visiting potential clients.

Many people working at home use one room in their house as an office. If, for example, one of six rooms in your home is an office you can set one-sixth of the heating and lighting bills against tax, as well as one- sixth of the rates. There will be many other tax-deductible expenses, and an accountant can make the most of the allowances open to you.

Home insurance

Some specialist insurers, like Zurich, offers home office cover as an add-on to their standard contents insurance. Other insurance groups offer much more specialised policies (see box for details of all-in policies).

"Most self-employed people need much more than extended contents insurance cover," says Ian Jones, of broker Tolson Messenger, which specialises in deals for the self-employed. "Insurance contracts will always cover mobile phones or laptop computers if they are stolen from home. But they may well leave you on your own if equipment disappears when you are visiting clients."

You should tell your mortgage lender that you are going to work from home and your motor insurer if you plan to use the car for your work.

If you are thinking of moving house or taking out a loan, say, for a new car, do it before you go self-employed. Lenders are notoriously old fashioned and many still demand three years' audited accounts before they will take you on as a risk.

Look at taking out a flexible mortgage before you go self-employed. These deals allow you to make overpayments when you have cash to spare, and then miss a month or two when times are harder. Many lenders have flexible deals, including Legal & General, Woolwich and Sainsbury's Bank.

Health

It's vital to sort out insurance that will pay a lump sum if you fall ill, or pays you an income if you can't work through illness or disability. Premiums can easily top pounds 100 a month for a woman wanting a monthly income of pounds 1,300. But you can knock down the cost by agreeing to a lengthy waiting period before the policy pays out.

Also check all your existing insurance policies. Some unemployment and sickness insurance polices designed to pay the mortgage when you have no income are set up to exclude the self-employed. If you have an income replacement scheme in place, you can probably do without a separate mortgage payment policy.

n Contacts: Axa, 01222 239 239; Cornhill, 0845 601 0594; Norwich Union, 0800 0562 450; Tolson Messenger, 0800 374 246.

HOMEWORKER COVER*

*For a 35-year-old graphic designer living in Cambridge

Cost Equipment Equipment Employer/

(home) (away) public

liability

Tolson pounds 228.48 pounds 7,500 pounds 1,500 Yes

Norwich Union pounds 315.22 pounds 7,500 pounds 2,250 Yes

Cornhill pounds 449.63 pounds 7,500 pounds 1,500 Extra

Axa Unity pounds 466.27 pounds 5,000 pounds 1,500 Extra