Ever thought about being your own boss? Whilst the idea is a somewhat appealing career path for enterprising individuals, it is not necessarily the best choice for everyone. Before making the leap into the world of self-employment, you will need to look at the benefits and drawbacks of being self-employed.
Benefits of being Self-Employed:
There are plenty of perks of being self-employed. Here are some of the main factors the self-employed benefit from:
- Flexibility and Control - so it may be easier to fit your work around other commitments and responsibilities, including childcare
- Variation - you may be working on several different projects for different clients at any one time
- Creativity - you can explore your creative and entrepreneurial side as you build your own business
- Finance – some travel, utilities bills, mobile, tech and training costs will be tax deductable
- Salary - day rates for self-employed consultants and contractors tend to be much higher than salaries
- Location – you choose the locations where you wish to work
Drawbacks of being Self-Employed:
It’s important to take into account the drawbacks of being self-employed too, in particular the risks and costs:
- Clients - finding clients, or a route to market, can initially be challenging
- Costs - there are likely to be some start-up costs, so you may need some money to get started
- Salary - your income isn’t guaranteed, which can sometimes make it hard to keep up with rent or mortgage payments, loan payments and living expenses
- Pressure - you bear the responsibility for the failure or success of the business, so you don’t have much back-up if things go wrong
- Holiday & Sickness - if you take a holiday, or can’t work because you’re unwell, you won’t get paid
- Finance - it can be more difficult to get approved for renting property, taking out a mortgage or getting a loan when you’re self-employed
- Family time - when you’re self-employed, it can be difficult to separate your home life from your work life, and to get a good work-life balance
- Isolation - if you’re working on your own a lot, being self-employed can be isolating
- Organisation - you need to deal with the admin side of your business, which involves bookkeeping and complying with regulations
Prior to becoming self-employed you must ‘Do your research’.
It is of paramount importance to research your market to ensure there is a demand for your product, service or skill set. The research will enable you to understand what the ‘Total Market Available’ is in your field.
Use job boards, salary checker tools or speak to other self-employed people in your market to know what the going rate of pay is. You will also need to know the locations where the demand for your services and skills meet your requirements.
When you become self-employed, you’re effectively setting up a business, even though you might not see it that way. This means that you need to decide on a business structure. If you don't know how to do so, taking business training can help you figure out the best way to launch your idea.
We've taken an in-depth look at setting up as a sole trader - usually the simplest business structure to choose when you go self-employed. However, you may also decide to incorporate as a limited company.
Starting a limited company
If you’re starting a limited company, there are certain things you need to do which include:
- Company Name - must be unique, and not contain any ‘sensitive’ words or phrases – i.e. you can’t use a trademark in your name or pass yourself off as something you’re not. It is worth spending some time choosing the right name for your company
- Registered Address - You must have an address where official mail can be sent. Many contractors simply use their own residential addresses, or you may decide to use a third-party service, or even your accountant’s company address for this purpose
- Company Officials - To form a company, you must have at least one director. You may decide to appoint a company secretary, although this is no longer mandatory. You will need to have all your officials’ names, addresses, nationalities and dates of birth to hand when you apply. If you’re concerned about privacy, directors may elect to use a ‘service address’, so that their residential address doesn’t appear on the public record.
- Share Structure - You need to decide how the shareholdings in your new company are apportioned. Will you own all of the shares yourself, split them with a spouse, or with other people? Do you require different classes of shares? When you declare dividends, they must be distributed exactly in the same proportion as the shareholdings themselves.
- Articles of Association - All companies must have a set of Articles, which act as a ‘rule book’, and govern all aspects of running a company – including directors’ powers, decision making by shareholders, voting rights, and how dividends are distributed. You can elect to use ‘model articles’ (a generic document), which should be sufficient in the majority of cases.
- Memorandum of Articles - This is an agreement which confirms the intention of initial subscribers to form a limited company
Starting up as a sole trader
If you intend to become self-employed in the UK as a sole trader, these are some of the things you need to do:
- tell HMRC that you’re self-employed, so that they know you need to pay tax through Self Assessment and pay National Insurance contributions
- set up a business bank account
- establish a process for recording your profits and evidence of your business expenses. This will make it much easier when it comes to completing your HMRC tax return
- if you’ll be working from home, check your tenancy agreement or mortgage agreement to make sure you’re not contravening any terms. You may need to notify your landlord or mortgage lender
- sort out your insurance – public liability and professional indemnity insurance are the main types of business insurance to consider, but there are plenty of other covers too. And if you’ll be employing anyone, you’re usually legally obliged to have employers liability insurance.
- consider your pension – although you won’t benefit from employer contributions, you’ll still get government contributions into your pensions in the form of tax relief
Paying tax when self-employed: how much will I pay?
The Office of Tax Simplification (OTS) has called for an urgent, digitally focused review of the self-employed tax system, calling it 'too difficult (...) to understand'. Until their suggestions are actioned, however, it's worth getting on the front foot with your tax, as soon as you go self-employed.
How much tax you’ll pay as a self-employed person will depend on how much money you’ve made and the ‘allowable expenses’ you’ve incurred in the course of your business. Certain business-related expenses can be subtracted from your income when you’re calculating your taxable profit.
The tax-free personal allowance and the tax bands are the same for self-employed and employed people, so for 2020-21 you can make up to £12,500 before you need to pay tax. You’ll then pay the basic rate of income tax (20 per cent) on income up to £50,000. The higher rate of 40 per cent applies to income over £50,000, and on income over £150,000 you pay the additional rate of 45 per cent.
Going self-employed but working for a company
Of course, you may be going self-employed part-time, and continue working for a company during the rest of the week. This means you’re both self-employed and employed, and you’ll pay tax through both PAYE and Self Assessment.
You could also be self-employed but only work for one company (for example if you have a single major client), but in this case HMRC will be keen to make sure that the company isn’t just calling you ‘self-employed’ to avoid paying National Insurance contributions and giving you employment rights. To count as self-employed, you usually need to have choice over when and where you work and you’ll usually be paid when you issue invoices.