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As more people are becoming self-employed, there are warnings of over-looked financial implications

SELF-EMPLOYMENT and second jobs are on the rise.

This week, Direct Line Home Business Insurance estimated that in the past six months 1.5 million Britons have launched their own business to supplement income from their primary job, while more than three million held second jobs.

Earlier this year, the Office for National Statistics reported a strong increase in self-employment between 2011 and 2012 across Scotland, England and Wales. At the end of 2012, 12% of Scots were self-employed.

Being self-employed has a number of pros and cons. Bruce Saunderson, head of advisory at PricewaterhouseCoopers in Scotland, says: "There are various tax advantages to being self-employed. You can offset more expenses against income tax than if you are an employer.

"There can also be a cash-flow advantage in only having to pay tax twice a year rather than every month. But you have to be disciplined to make sure you have got the money available to pay the tax bills when they arise."

Some people choose to set up limited companies, but Mr Saunderson insists that affords no huge tax advantage over being self-employed.

He says: "People tend to focus on the fact that corporate tax is lower but at some point they will have to take the money out of the company as an income or dividends and pay income tax on it. In the meantime, their money is trapped inside the company."

Either way, there are downsides to working for yourself because it means you will only have yourself to rely on. You won't get paid holidays, sick pay or a company pension.

However, there was some good news recently, when the government confirmed the self-employed will receive the new single-tier state pension. Previously, they didn't qualify for any Second State Pension.

Now, instead of receiving just the basic state retirement pension, currently £110 per week, any self-employed person who retires after April 2016 will get the new flat rate pension, which will be the equivalent of £144.

So far the government has not stated whether the self-employed will be required to pay higher national insurance contributions as a quid pro quo for the higher pension.

But Ian Naismith, pension expert at Scottish Widows, points out: "The self-employed are among the biggest gainers from the change so it is quite possible that they may have to pay more NI." Pension provision is a key difference between being self-employed and employed. As a self-employed person, you don't have an employer paying towards the cost of your pension.

Even though final-salary pension schemes are rapidly becoming a thing of the past, more employees are now being automatically enrolled into a pension, to which their employers are obliged to contribute.

This loss of pension can be significant. Over the course of an average working life, self-employed workers are missing out on up to £91,512 in contributions from an employer to a company pension scheme, according a new analysis by the Prudential.

Other benefits that may be lost when people switch from employment to self-employment include life cover, income protection and private medical insurance, points out Richard Wadsworth of Carbon Financial Partners in Edinburgh.

These benefits may have been largely taken for granted, and when people find out the cost of purchasing the same cover on an individual basis it is likely to cost a lot more than they expect.

Expecting newly self-employed people to pay for these things can be a big ask, admits Mr Wadsworth. He says: "The top priority for someone with a young family is to take out life insurance to replace the loss of their death-in-service cover.

"For those who don't want to spend more on buying protection, the next best thing is to chip away at any debts that may have arisen in setting up the business."

Mr Naismith says Scottish Widows research shows only one-third of self-employed people are saving adequately for a pension, compared with 45% of the general population.

He says: "Their reluctance is sometimes due to the fact they are reluctant to lock their money away in a pension in case they need it for their business.

"My message here is you don't have to save via a pension. If you put money into an Isa, this would be just as good, and you could transfer it to a pension later."

Many self-employed people work from home and Direct Line has warned that even if it is only a part-time activity, it is important to consider whether you are covered by your home insurance policy.

It may not be possible to claim if a theft, fire or flood results in loss or damage to business equipment or stock, and the policy may not provide the necessary public liability or product liability cover.

Direct Line says taking out this type of cover is not necessarily expensive.

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