Self Employment vs Employment: 3 reasons why you might be better off than you think

Kirsty Young Employees, Freelancers

Which is “better”, being self-employed or employment? Like most aspects of business, there’s no clear-cut answer, with pros and cons on either side.

In this article, we’re going to be positive, and concentrate on the key cash-in-your-pocket ‘wins’ you may not have considered.

What we won’t discuss in any detail here are things like the comparison between overall pay and say loss of holiday pay, secure work, pension contributions etc. (We all know these are a challenge.)


A Word on Limited Companies

The term ‘self employed’ isn’t clear-cut, as it’s often used to describe an approach, rather than the technical trading status. So, business owners may refer to themselves as ‘self employed’ when they are actually/technically employed by their own limited company.

It’s not just business owners either. Some lenders and government departments often use the term ‘self employed’ for this micro business limited company scenario.

That’s why we’ll be talking in the main about self-employment, but we do mention near some additional limited company benefits too.


3 reasons to consider self-employment

1. The Tax Rates

Many people point to the tax rate as a good reason to going self-employed. The effective overall tax rate for a self-employed person is lower than that of an employee, at the time of writing. This is primarily due to paying less National Insurance.

As a rough rule of thumb, a self-employed person is around 2% better off in terms of National Insurance (as at the 24/25 tax year).

However, the actual income tax rates are the same whether you are employed or self-employed. This is because you are taxed as an individual, and as far as HM Revenue & Customs are concerned, your business is you.


2. Paying for things before tax has been taken off

One of the most overlooked aspects of self-employment is that you can pay for things in your business before the tax is calculated. These items are often referred to as tax deductible.

When you are an employed person, all the money you have received into your bank account each month has already been taxed. Therefore, everything you buy is being paid after tax.

With a sole trader/self-employed business if the expense fits the criteria for a tax deduction, you are effectively paying it before tax. So, the expense can feel cheaper, or that your tax bill just got reduced. Either way, the effect is the same.

This can feel like a real benefit if you are able to gain a tax deduction (in full or part) on costs that can benefit you personally as well. These might include:

    • Telephone
    • Vehicle costs
    • Use of your home as an office
    • Pens and stationery (remember these??!)
    • Travel costs when combined with a business purpose
    • IT equipment

NB: There are detailed rules about how, if and when the above items are tax deductible. Always consult your accountant for the latest information.


3. Some control of when and how much you are taxed

In the UK tax system, there are some ridiculously punishing tax thresholds. So, when you reach a certain level of profits, your tax rate spikes. You will get an increase to your tax rates, you can lose benefits, or (worse) a combination of the two.

The good news is that, as a self-employed business owner, you can choose not to earn more money in a given tax year. After all, you are usually in command of whether you take on more work, or wait until, say, the next tax year.

You may also be able to divert some income through:

    • Asking your partner to do some paid work for you, which can help with managing these thresholds in certain situations.
    • Making a choice as to how to gain a tax deduction on large equipment. If you purchased a new van, for example, you can use these allowances to help lower profits. Sometimes you can claim 100% of the item’s cost in one year.
    • You can prepare your tax return on what’s known as the ‘cash basis’. This is where you are taxed on money actually paid in the tax year, so you could ensure you don’t get paid some cash until the next tax year.

Employed people will rarely be able to do these things.


An extra point: choosing how you are taxed

Limited companies can bring their own additional benefits. Government changes over the past few years have whittled away some of the most obvious benefits in terms of tax rates, but three key benefits remain:

  • The capability to time income and/or manage income across multiple people (as mentioned in point 3), becomes even easier in a limited company with the right set up.
  • You also gain access to other ways of being taxed in terms of the use of Dividends
  • Some limited company expense deductions work even better for tax than they do for a self-employed person, including telephone expenses, and so-called Trivial Benefits.


It’s difficult, but at least it’s tax efficient

So whilst being self-employed can be stressful, uncertain and hard work, from an tax-efficient income point of view it can actually be very good.

If you are considering going self-employed, or setting up your own company, and don’t have an accountant, we are here to help. Contact us to discuss your options in more details :