Self-Employed

Is self-employment right for me?

Self-employment has its advantages and disadvantages, and when you think about being self-employed versus being an employee, you need to consider a number of things, including:

• Do you know how to attract clients or customers?
• Do you have some money to start up?
• Would you be able to cope with periods of little or no income?
• Do you have the confidence to manage your own business, such as managing cash flow, keeping accurate records and completing tax returns?
• Have you considered the impact of losing employee benefits, for example holiday pay, sick pay and employer pension contributions?
• If you were self-employed, would you miss working with colleagues?
• Do you have a place to work and the equipment you need, or do you have the budget to purchase it?
• Are you taking into account any life-changing events, such as an upcoming move, wedding or new baby?

Advantages of self-employment

There are many benefits to being self-employed, including:

• You have more flexibility and control, so it can be easier to fit your work around other commitments and responsibilities, including childcare.
• Your work can be more varied, as you may work on several different projects for different clients at the same time.
• You can explore your creative and entrepreneurial side by building your own business.
• When calculating your tax liability, you can deduct certain costs—such as travel expenses and some utility bills—from your income.
• You could potentially earn more, as daily rates for self-employed consultants and freelancers are often significantly higher than wages.
• You might be able to eliminate commuting, as you are likely to work from home or your own premises.

Disadvantages of being self-employed

It is important to also consider the disadvantages of self-employment, in particular the risks and costs associated with self-employment, for example:

• Finding your way into the market or attracting clients may initially be challenging.
• There will probably be some upfront costs, so you may need some money to get started.
• Your income is not guaranteed, which may make it difficult to cover rent or mortgage payments, loan repayments, and living expenses.
• You are responsible for the failure or success of the company, so you won’t have much reserve if something goes wrong.
• If you take a holiday or are unable to work due to illness, you won’t get paid.
• It may be more difficult to get approval to rent a property, take out a mortgage or borrow money if you are self-employed.
• Self-employed people can find it difficult to separate family life from work life and achieve a work-life balance.
• If you work alone a lot, self-employment can be isolating.
• You have to deal with the administrative side of the business, which includes bookkeeping and compliance with regulations.

Starting a business as a self-employed person

If you’re planning to work for yourself in the UK as a sole trader, you will need to:

• Let HMRC know you are self-employed so they know you have to account for tax through Self Assessment and pay Class 2 and Class 4 National Insurance contributions. Go to the government website to register, or see our article on registering with HMRC as a sole trader for more information.
• Open a business bank account.
• Set up a process for recording profits and business expense receipts. This will make completing your HMRC tax return much easier.
• If you will be working from home, check your lease or mortgage agreement to make sure you are not breaching any terms. You may need to notify your landlord or mortgage lender.
• Think about your pension. As you will no longer be contributing to your workplace pension, it may be a good idea to set up a private pension so that you can continue to put money away for retirement. Although you won’t benefit from employer contributions, you will still receive government contributions to your pension in the form of tax relief.
• Think about your pension. Since you won’t have a workplace pension anymore, setting up a private pension to continue saving for retirement is a good idea. Although you won’t benefit from employer contributions, you’ll still receive government contributions in the form of tax relief for your pensions.

Paying tax when self-employed: How much will I pay?

How much tax you pay as a self-employed person will depend on how much money you earn and the “allowable expenses” you incur as part of your business. Some business-related expenses can be deducted from your income when calculating your taxable income.

The tax-free personal allowance and tax brackets are the same for self-employed people and employees, so in the 2021/22 tax year, you can earn up to £12,570 before you need to pay tax (£12,500 in 2020/21). After that, you will pay the basic income tax rate (20%) on income up to £50,270 (£50,000 in 2020/21). A higher rate of 40% applies to income above £50,270, and an additional rate of 45% is paid on income over £150,000.

Self-employed but working for a company

Of course, you can work part-time as self-employed and continue to work for a company for the rest of the week. This means you are both self-employed and employed, and you will pay tax through both PAYE and self-employment.

You may also be self-employed but work exclusively for one company (for example, if you have one big client), but in this case, HMRC will want to ensure that the company isn’t just calling you “self-employed” to avoid paying National Insurance contributions and granting employee rights. To qualify as self-employed, you usually need to have a choice of when and where you work, and you will generally get paid by invoicing. Check the government website or speak to an accountant if you’re unsure.

Running a business and getting a mortgage

One of the disadvantages of being self-employed is that getting a mortgage can be harder, but it’s still possible.

When applying for a mortgage as an employee, the lender usually verifies your income by asking for payslips and bank statements. If you are self-employed, you will typically need to provide business accounts, including copies of tax return forms.

Lenders often ask for accounts from two to three years, so you might not be able to get a mortgage if you’ve just started self-employment.

Typically, a lender will take an average of your income over the past two or three years to calculate how much they are willing to lend. They may also ask to see other documents—such as business plans—to ensure that they are confident you will be able to keep up with mortgage repayments.

What can I claim as a self-employed person?

Allowable self-employed expenses

In terms of what you can deduct from your income when determining your taxable self-employment income, the list includes business insurance, part of your utility bills if you work from home, office expenses, supplies, and some business-related travel. However, be sure to check the government website, as you can get into trouble with HMRC if you deduct something that isn’t an allowable expense or if you don’t have proof of the expense.