Self employment in the UK part1

Selt employment in the UK- should I go Self-employed/ start my own company?(Part 1)

There are many arguments for and against self-employment vs employment and indeed from self-employment vs a limited company. I am going to focus on the jump between going from an employee to being self-employed. Some people find this jump the hardest, as you go from the relative 'safety' of a job to being self-employed. In fact, the field of self employment often involves the in between stage where someone is earning in a different capacity, outside of their work.

 My friend was having some financial difficulties recently and I spent one hour with him. On his tax return I showed him that off setting costs, including equipment, could not only reduce his tax bill but he got £400+ back in a rebate. A £500+ return in less than one hour! There are many perks, both financial and non financial, to being self-employed.

 Most common reasons to go down self employed route -
More flexibility - To earn more - To be in charge of one's day - Tax reasons - To be creative - To have freedom of location.

I have already hinted at the potential savings of being self-employed, I'll continue with the hinting.
One major difference is spending. If you are self employed and need a piece of equipment, (lets say you enjoy painting and plan to sell the occasional painting or two) you buy it. Great, new paintbrushes or whatever. You then store away the receipt (or give it to your bookkeeper or accountant). Later in the year they can then use this information to offset for tax. Therefore if you make £10,000 one year, above the non taxable threshold (that changes every year- so for longevity's sake I'll leave out) and you spend £5,000 on equipment then that £5k is no longer liable for tax!

This means you can get some tax savings. As an individual wage slave, no luck. You still pay tax on all your income, receipts or no receipts. Self-employed, your income comes down. That sounds bad on first thought, but not when you save money as you then do not need to pay that extra money in tax. Carrying on with the 5k example, if hypothetically speaking (again tax rates change all the time, and are different in different countries) if the rate was 20% tax on this 10k income and 5k was expenses then you only get charged tax on the remaining 5k. Thereby saving £1000 in tax!


What about a Limited Company?

If you do the same example but suppose that the situation we are comparing is a top earning executive earning 100k a year with 40% going to the tax man, ie £40,000. As a opposed to a  consultant who owns their own small consultancy practice who then paid himself in dividends or kept the money within the company, only paying himself £30k and having expenses- travel,food, equipment (nice new laptop/phone anyone?) of 10k per year...Then he might only be 'earning' 20k (over the year).Therefore he might only be taxed- probably in the smaller tax band of about 20%- equaling 4k. Quite a difference.

The Company, he owns, though will have a lot of money in the bank. Money, or freedom, to do what it wants/needs to.

There's the difference. The difference between separating yourself, from the business.

Big earning individuals. Good. Good for an ego. Great for the taxman.

Big earning company who pays their 'staff' (ie You!) a regular salary but keeps the money for future growth within the company. Great for you, not so great for the taxman as the company, ie Your Company, keep the money.

I'm no accountant but being Self-employed in the UK (and probably in other countries too) allows you to legally save money on tax. Great for people who are interested in working for themselves and/or owning a company/companies!

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Other articles you might like:

Self employment in the UK part1

If you own a company or have started one, or are starting, please do comment and let us know your experiences... Wishing all our readers all the best!