If you are self-employed you can deduct expenses from your business income for example, travel, telephone, insurance, use of home as office and employment costs. You may also be entitled to capital allowances on eligible capital expenditure and interest on loans taken out to finance the business. In contrast, employees can only deduct work-related expenses when they are wholly, exclusively and necessarily incurred in the performance of their employment – usually limited to business travel and professional subscriptions.
National Insurance (NI)
Highlighted by the Chancellor’s abortive attempt to raise Class 4 National Insurance, there is a discrepancy between the amount of NI paid by the self-employed and employed. The selfemployed currently pay weekly Class 2 NI of £2.85 and Class 4 NI at 9% on profits between £8,164 and £45,000 and 2% on profits above this. However, the employed pay Class 1 NI at the higher-rate of 12% between £8,160 and £45,000 (2% above this). The employer also pays Class 1 secondary NI at 13.8% which increases their wage bill and feasibly decreases the amount payable to the employee. Following Philip Hammond’s U-turn and given the current minority government, it appears attempts to equalise the amount of NI paid by the employed and self-employed are on the back-burner for now.
A disadvantage of self-employment is the administrative burden of keeping business records, submitting accounts and tax returns alongside the associated cost of professional advisers. Being self-employed can also result in the need to register for VAT if you make taxable supplies exceeding £85,000 per year. VAT returns need to be submitted and amounts due paid to HMRC quarterly. From a cash flow perspective you will pay income tax annually on 31 January and 31 July rather than have tax deducted at source under PAYE. This can be advantageous from a cash flow perspective however you will need to ensure enough is set aside to pay the tax when due.
Loss of Employment Rights versus Flexibility
Another important consideration is the trade-off between the flexibility of choosing how and when you work against losing access to employment rights; particularly the rights to statutory sick or maternity/paternity pay. By going alone you gain the ability to maximise your income and grow your business and can potentially employ family members to pay a wage utilising their personal allowance and reducing your taxable income. Conversely, you lose access to colleagues’ expertise you may have had and are also at greater risk, for example of being sued personally if you carry-out defective work.