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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.
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're working under a contract of employment.
This generic term is often used to describe a worker who is not employed and may provide services to lots of different clients. Often a freelancer or contractor, may work on a series of short-term assignments.
Sole trader - You can operate your business as a sole trader, which is essentially you running the business in your name – you and the business are one and the same.
Limited company - You can operate your business through a limited company of which you would be a director or a shareholder.
Umbrella company - The 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 payroll - The agency is the contractors employer and is responsible for deducting employed levels of tax and NI, paying them their salary.
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 of your limited company you can opt to pay yourself a salary from the business. The amount and frequency of salary is entirely your choice and can be changed at any time.
As a shareholder of the limited company you would also be entitled to receive any dividends which are distributed by you in your capacity as director. Once paid dividends will be taxable as income in your hands as a shareholder.
As an employee your company can fund benefits for you but they may be taxable in your hands.
Here we compare the differences between being an employee, sole trader and owner of a limited company and which benefits are best for each option.
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.
Find out here
If you do need any further help or guidance please don’t hesitate to contact our experienced team.
