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Should your client go self-employed?

  • Describe the tax differences between employed and self-employed
  • Identify some of the drawbacks of being self-employed
  • Describe some of the responsibilities of being self-employed
CPD
Approx.30min
Should your client go self-employed?

Although the government has introduced measures to protect jobs, the Covid-19 crisis is resulting in rising unemployment and job uncertainty.

Unsurprisingly, many are considering starting their own business and becoming self-employed.

Working for oneself can be very lucrative and provide the work-life balance many yearn for. Paying less tax, being one’s own boss and keeping the profits sounds appealing, so why are we not all doing it?

Working for yourself is hard, can be lonely, and the buck stops with you.

Business owners are responsible for finding work or customers, delivering, keeping records, and paying tax - which may not be an enticing prospect. A good employee does not always make a good boss.

The pluses and minuses of self-employment

Tax

The decision to become self-employed is often tax driven. An employee pays more tax overall than a self-employed person because national insurance contributions (NICs) differ:

  • Employee: Class 1 NICs paid at 12 per cent
  • Self-employed: Class 4 NICs paid at 9 per cent plus Class 2 NICS of £3.05 per week (2020/21) provided profits exceed £6,475 (2020/21)

It would be wise to bear in mind that there are no guarantees the tax differential between employed and self-employed will remain.

There has been increasing pressure for NIC rates to be aligned, and as many commentators believe the current levels of government spending will result in tax increases, these would be an easy target.

Although there is currently a tax benefit to being self-employed, this is only for those who are considered self-employed by HMRC.

For many it will be obvious, but HMRC offer online tools to help decide status, and professional advice should be sought if there is any doubt. 

Employees are subject to PAYE with tax deducted from salary as it is paid.

The self-employed pay most of their tax after they have earned the money and deducted expenses, with the tax payment dates being January and July each year.

Beware tax bills when starting out, though, as opening year rules for calculation and payment of tax are complex.

After the first complete year, most self-employed will be required to pay the following year’s estimated tax bill in advance, so you could end up having to fund payments on account that are equivalent to the same amount of tax already paid - unless you predict your profits will be less.

The self-employed pay tax through self-assessment, which means completing an annual personal tax return, and registering for VAT depending on turnover limits. Currently there is a timing advantage in paying tax for individuals who are self- employed.

HMRC has been proposing introducing Making Tax Digital (MTD) for individuals, under which they would upload financial information and pay tax more frequently throughout the year, more in line with employees under PAYE. 

Choice

A self-employed person has no-one else to answer to and the ability to choose working hours; but in reality, of course, customers are the demanding bosses of the self-employed. 

A self-employed person can theoretically work from wherever they choose. This can reduce the length of commute and allow more time for family life.