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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.
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.
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.