According to the most recent Labour Force Survey, there has been a rapid growth in the number of self-employed in the UK in recent years. The number people choosing to become their own boss has increased from 3.3 million people in 2001 to 4.8 million in 2017, now making up over 15% of the UK labour force.
But what does it mean to be self-employed and how does this affect the money earned and taxes paid?
Self-employed - What does it mean?
In its simplest terms, a self-employed person is an individual who runs their own business for themselves and takes responsibility for its success or failure. There is currently no definitive definition according to UK law, but you’re likely to be self-employed if the following are true:
- You can agree to take on work or can hire someone else with similar skills to do the job for you at your own expense.
- You have several customers at the same time, and you choose how, when and where you work to complete all jobs to agreed deadlines.
- You provide the equipment or specialist tools you need to do your work.
This is not an exhaustive list, but if all three of these statements are true, then chances are you’re self-employed.
The pros of being self-employed
There is a lot to take into consideration before you decide to become self-employed, starting with the advantages of being your own boss:
- You have more control over your work schedule giving you the flexibility to be able to run your business around other commitments.
- You can enjoy a variety of different jobs meaning that no two days are ever the same.
- Certain business related costs can be deducted from your income when you’re calculating your tax liability.
- You have the potential to earn more money than you would as a paid employee if you’re prepared to work hard and put in the hours.
The cons of being self-employed
Of course, there can be downsides to being self-employed too. These include:
- The start-up costs can be significant for individual businesses to get off the ground.
- Your income isn’t guaranteed as it would be if you were an employee.
- You’re responsible for the success or failure of your business.
- You don’t get paid if you need to take some time off work for a holiday or illness.
- Getting a loan, mortgage or credit card can be more difficult.
- Achieving a healthy work/life balance can be tough.
- You need to deal with the admin side of your business, which involves bookkeeping, paying taxes and complying with regulations.
Self-employment as a franchisee
There is another way that you can be self-employed with less of the hassle. A franchisee is a self-employed business owner who uses the brand and systems of an established company rather than starting an independent business from scratch. And there are currently more than 900 franchised businesses in the UK, so there’s bound to be an opportunity to suit all interests and budgets.
As a franchisee, you’re the boss, and as such you’re responsible for how hard you work and therefore how much money you make. You’re in control of hiring and managing any employees you need, and developing and growing your business by acquiring new customers.
The main advantage of franchising is the level of training and support that’s available to help you make your business a success. As a franchisee, you’re in business for yourself but not by yourself.
Franchises are tried and tested business models with a proven track record of success. The franchise system has developed over time, with any problems being solved along the way. This means that franchisees can run their business more efficiently thanks to the fact that they get to learn from mistakes that have already been made.
As well as guidance from the franchisor and their support team, as a franchisee you’re part of a network of other people in the same situation as you are. You get to share your experiences and challenges with them and learn from each other. This sense of community of all striving to grow the same brand to be the best that it can be is ideal for aspiring entrepreneurs who want to run their own business but feel daunted by the concept.
Self-employed income definition
It can be difficult to collect income data and self-employed earnings to measure it reliably. This is because self-employed earnings tend to be irregular over time compared to the relatively stable working patterns of employed people making it tough to report income over a specified period accurately.
However, a recent report released by the Office for National Statistics shows that the level of earnings among the self-employed is lower than among employees. The average income for self-employed individuals appears to be around £240 a week, which is much lower than the average for employees at £400 a week. This may be the result of many differences between employees and the self-employed, including industry of employment, the number of hours worked or the method used for remuneration.
Self-employed tax definition
Regardless of the income made though, tax needs to be paid on it if it’s above the current personal allowance of £11,850. Paying income tax is one of the key responsibilities that come with being your own boss.
The amount employees pay in income tax on the profits they make in a tax year is usually deducted from their salaries before they are paid. However, the self-employed must pay income tax differently, and they may pay a different amount.
For the 2018/19 tax year, the basic income tax rate is 20%, applying to earnings between £11,851 and £46,350. For earnings between £46,351 and £150,000, the rate is 40%. For earnings above £150,000, the rate is 45%.
However, the self-employed can also offset some of their spending against tax meaning that they can reduce their taxable income by removing certain expenses from it. These tend to be costs that are exclusively for business purposes
Instead of paying income tax through PAYE, self-employed people must file an annual ‘Self-Assessment’ tax return. The tax return generally needs to be completed by the 31st January each year at which point any tax due must also be paid. There are penalties for both failing to register for ‘Self-Assessment’ and not completing the return by the deadline date.
Self-employed National Insurance definition
As well as needing to pay income tax, the self-employed also need to pay National Insurance contributions (NIC). When you register as self-employed with HMRC, it covers both income tax and National Insurance.
How much is it?
£2.95 per week
Calculated as 9% of profits
Is there a minimum level of profits made before NIC is paid?
Yes, you only pay if profits are above the Small Profit Threshold of £6,205
Yes, you only pay if profits are above £8,424
Is there a maximum level of profits made when NIC payments can stop?
If you’re employed and self-employed and you pay the maximum amount of Class 1* NIC then you may not need to pay Class 2
If you make profits above £46,350 as self-employed, you’ll pay Class 4 NIC on profits above £46,350 at a rate of 2%.
If you’re employed and self-employed and you pay the maximum amount of Class 1* NIC then you may only need to pay Class 4 on profits above £8,424 at a rate of 2%.
* Class 1 NIC is paid by employees earning more than £162 a week and under State Pension age which is automatically deducted by their employer.
As well as tax and National Insurance considerations, the new General Data Protection Regulations (GDPR), which came into effect in May 2018, also needs to be adhered to by the self-employed. These regulations govern how businesses collect, store and handle data that they hold about their customers.
The regulations state that any business that holds personal information about their customers’ must be able to prove that they obtained consent to do so. Failing to comply can result in significant penalties.
Businesses must also appoint a Data Protection Officer, but smaller businesses and the self-employed don’t need to do this. However, they could be fined up to 4% of their annual turnover if they don’t obtain sufficient consent to collect, hold and use a person’s data. The consent needs to be clear and recorded securely with information about when, how and why it was granted. Customers also have the right to remove permission that was given previously and for their data to be deleted.
>> Read more: Entrepreneur definition.