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What are the benefits of being self-employed?

There are lots of benefits of becoming Self-Employed, ranging from a better work/life balance to setting your own financial worth. The benefits often make the effort worthwhile for many aspiring entrepreneurs, however in order to fully weigh up the pros and cons we first need to understand the differences between a permanent employee and a freelancer.

Permanent employee

Most of the UK workforce hold this status. They are under the supervision, direction and control of their employer in the working environment. Legally they are working under a contract of employment – as we’ll see, this has both advantages and disadvantages.

Freelancer or Contractor

This generic term is often used to describe a worker who provides services to lots of different clients. Often a freelancer or contractor, may work on a series of short-term assignments

As a freelancer or contractor there are two ways in which to work:

Option 1: Self-employed contractor

Sole traderYou can operate your business as a sole trader, which is really running the business in your name – you and the business are one and the same.

Limited companyYou can operate the business through a limited company of which you would be a director/shareholder.

Option 2: Employed contractor

Umbrella companyThe umbrella company is the employer and the contractor works through the umbrella company who deducts all of the necessary tax and NI, paying the contractor their salary.

Agency payrollThe agency is the contractors employer and is responsible for deducting employed levels of tax and NI, paying them their salary.

What are the pros and cons of being self-employed? 

Pros:

  • Self-employed persons generally do earn more than employees in certain sectors as they have more control over their hourly rate.
  • The self-employed are still eligible for certain state benefits by virtue of the Class 2 National Insurance Contributions.
  • A self-employed person can still make personal contributions into their own pension plan. For a person running their own business through a limited company there is an opportunity to set up their own company pension scheme and get tax relief on the contributions which the company makes.
  • They have the flexibility to set their own hours and often work on the days that suit them which greatly improves their work-life balance.
  • Further qualifications and development can be supported by tax relief and may repay the investment by making the business, more marketable.

Cons:

  • The self-employed may have gaps between contracts during which they’re not earning whereas an employee can expect continuity of employment.
  • They will have to make their own financial provisions for when they take holidays, sick pay and maternity leave.
  • Without an employer, the self-employed won’t receive an extra payment from their employer into their pension pot.
  • Reduced hours can sometimes mean reduced income.
  • They will have to make the time and effort for training and development and do this as well as earning a living.

What are the differences in tax and national insurance?

You’ll pay tax and NIC on all your earnings under PAYE.

You get to deduct the cost of business expenses from your business income. You’ll pay two types of NIC depending upon the level of your income and income tax on your net profits. Any non-business expenditure you incur won’t be allowable for tax.

Your company is able to deduct business expenses including pension contributions and salary paid to you as a director. It will pay Corporation Tax on net profits.

As a director/shareholder you will probably take a small salary and pay a minimal amount of NIC, sufficient to guarantee your pension benefits. You will probably take advantage of paying out most of the company’s profits to yourself as dividends. Dividends enjoy a tax-free allowance and the balance is taxed at a more favourable rate than earnings making this form of self-employment the most tax efficient. You don’t pay National Insurance Contributions on dividends.

As an employee your company can fund benefits for you but they will be taxable in your hands.

Which option is best for you?

1 = the last choice, 2 = the next best choice, 3 = the best choice.

Similar pro/cons score the same. Obviously, it’s impossible to weigh the value of each of the elements – one may be far more important to you than another but hopefully this is a neutral, objective perspective to help you make a decision.

At the end of the day you’ll make the decision on what is best for you but if you do need any further help or guidance please don’t hesitate to contact PayStream on info@paystream.co.uk or call 0161 923 0201 (option 1).

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