The number of self-employed workers in the UK has seen considerable growth since the early 90s. In September 2021, about 4.3 million working adults shared this status. In this article we will look at what being self-employed means and how it works on the employment market.
When you are setting up as self-employed for the first time, you might need support with your contracts and documentation. Or your company might look to hire subcontractors to help with extra workload at very busy times. In both situations, we are here to help.
We will advise you on how to start off on the right foot. Our experts will give you self-employed advice on how to avoid pitfalls and mistakes, from employment status to income and taxation.
Call us today on 01455 858 132.
What does self-employed mean?
Being self-employed means running your own business and earning an income by working for yourself. The financial success and day to day operations of your business depend on you primarily. You can hire workers to help you or even do the whole work for you. And you will pay them from the fixed price you agreed with your customer/s.
Another term for a self-employed earner is that of a sole trader. If you are trading, you are self-employed, whether you make items and/or sell them for profit or provide services.
An independent hairdresser, dog walker, tailor or nanny working for themselves are all classed as sole traders.
Read our previous article that talks about different types of employment in the UK here.
How to go self-employed?
Before you do so, you should consider the advantages and disadvantages you get through this employment status.
What will you gain if you take on self-employed work?
Let’s look at the advantages:
- You gain more flexibility over when and how you will work. This can help you achieve a better work-life balance and spend more time with your family, for example.
- You decide where you will work – on customer’s premises or house, from your own home, or renting out a small office space. If you become self-employed working from home, make sure you separate professional life from personal life.
- You can deduct utility bills, travel and even costs towards your tools from your income.
In terms of disadvantages, consider the following:
- You don’t have a guaranteed self-employed income. This can impact on other aspects of your life, such as mortgage payments.
- You don’t get holiday or sick pay. So, you need to factor this in when you decide on what you will charge your customers.
- You need to find customers yourself and balance your marketing costs against what you are making.
If you decide that the benefits of going self-employed outweigh the risks, then you need to follow these steps:
- Register for Self Assessment and let HMRC know that you will pay tax through this service.
- Keep records of your business costs and sales.
- Pay income tax on the self-employed National Insurance rates, classified as either Class 2 or Class 4.
- Register for VAT for a turnover higher than £85,000.
Remember that, if you get workers to help, you will need to consider who pays their taxes too. They could work as independent subcontractors. In this case, you should give them a contract for services, similar to the ones you sign with your customers. If you employ them, you need to give them an employment contract.
How to keep proof of self-employment work?
Another important aspect of working for yourself is keeping accurate business records. These will prove what you earned against what you invested, and any costs involved. While you do not need to send your records to the HMRC, keep in mind you might be asked to show them.
The HMRC might want to see your records for a number of reasons:
- To check that you submitted accurate information in your Self Assessment form
- To check that you paid the correct tax
- To check that you are self-employed and not employed by the company you work for
We will discuss this point later in the article.
What records do you need to keep? Here’s the list as provided by the government:
- Your sales and income
- Your business expenses
- Your VAT records if this applies
- PAYE records if you employ people
- Records about your personal income
- Your grants, in case you applied for the Self-Employment Income Support Scheme
How does self-employment work?
Different employment statuses don’t exclude one another in the UK.
You can be self-employed and an employee at the same time – however, not working for the same company.
What do we mean by this?
Let’s say you are a graphic designer employed in the marketing department of a food producer. You also offer your services through your own business, creating brand assets for small companies at the weekend.
We previously explained how self-employed people can hire subcontractors to help. A good example in this case would be a YouTuber who pays videographers and video editors to help them create their content.
The construction and transport industries traditionally use self-employed contractors and subcontractors.
But can a self-employed person have employees? The answer is, simply, yes.
A construction contractor can employ brick layers, plumbers, and electricians. The contractor becomes a self-employed paying employees in this case.
The main aspect when you consider self-employed versus employee income is how you will pay tax.
Is there self-employed government help available?
Just like any type of business or work, self-employment will see periods of boom as well as stagnation. What do you do though when you cannot find self-employed work and your income falls drastically?
The Coronavirus pandemic has placed a lot of strain on people who work for themselves. Many faced a loss of their livelihood. As the government furlough scheme helped employees, self-employed people struggled to cope. Some failed to qualify for financial support under the Covid-19 scheme.
The Self-Employment Income Support Scheme opened for applications on May 13th, 2020, and closed on September 30th, 2021. It proved a lifeline for many people who work for themselves.
Regardless of the state of the economy, self-employed people can take a hit from industry related issues or personal ones. The government offers financial help for self-employed who suffer from lack or loss of work in the form of:
- New Style Jobseeker’s Allowance
- Universal Credit, which can apply in conjunction with claiming JSA
- Pension Credit, for workers who reached state pension age
Working part time for yourself and part time for an employer can often feel like the safer option. This will involve more paperwork and the obligation to complete the Self Assessment process every year. It could however offer you a safety net in difficult times.
What if I hire self-employed work for my business?
Under new off-payroll working rules (IR35), since April 2021, you as a client need to determine the employment status of the people you hire.
Companies like Amazon have faced scrutiny as a result of classifying some of their workers as self-employed. A UK law firm has launched group action against the retailer. They argue that the company treats their drivers as full-time employees without giving them any of the rights they should receive as a result. They are claiming a total of £140m compensation for at least 3,000 drivers.
How do you avoid ending up in a tribunal over such claims?
Remember that a self-employed worker retains their independence and control over how and when they work. You can agree on deadlines, but you cannot impose a schedule on their work. They will use their own tools and assets, and they can work for other clients too. You pay them an agreed fixed price for their work, not hourly based wages.
If you pay somebody a wage, require them to work fixed hours, and give them the equipment to work with, then you are more than likely employing them.
Call us for self-employed advice
Are you still unsure on the employment status of people you hired? Don’t get caught on the wrong foot and risk an HMRC IR35 enquiry. Even if you are deemed to have made a genuine mistake, you will still end up paying interest on any overdue tax.
If you hire self-employed workers, why risk workplace conflict and loss of reputation over genuine mistakes? Our Croner employment law experts will support you throughout the process.