Why self-employment can be good for you

The Chancellor's decision not to raise self-employed worker National Insurance contributions may have been the political focus of March's budget. However, it also highlights the growing importance of people who by choice or circumstances make a major contribution to GDP.

What's in it for me?

Increasingly referred to as entrepreneurs, the willing or redundancy-created self-employed are a growing force in the UK economy. Incomes can vary considerably, from the low earnings of Deliveroo riders where tax liabilities first kick in, to fees commanded by top barristers.

Going it alone can seem daunting. However, recent changes, including the revision of pension entitlements, can make an appropriate form of self-employment very viable for people with the right personality. Which is why covering some basics is important.

Choose your business model

One of the first decisions facing many self-employed people face is deciding on the business model that best suits their circumstances.

Although the Government clearly believes that the tax structure of employed and self-employed works must be brought closer together in the future beyond the life of this Parliament, our graph below shows that under prevailing 2017/2018 tax rates there are still considerable advantages for workers off-payroll in the informal economy.

What the data shows is that there are excellent opportunities for self-employed people and limited company owners.

For example, with profits of £25,000, the total tax for an employee under PAYE would be £4,720. The comparative figure for a sole trader is £4,363. A limited company owner would have a liability of £3,596. There are also huge savings if you have a two-director company, such as a husband and wife team. Here, your liability would be £1,276 due to two personal allowances.

Careful taxing planning is a good way to optimise this.

As a more detailed guide, Premier's 'The Essentials of Business' series available on our website explains how business risks and challenges faced by the self-employed leads to differences between tax relief and PAYE.

Aborted changes

In what he clearly assumed would be an uncontroversial part of his first full budget, Philip Hammond initially proposed that as of April 2018, Class 4 National Insurance (NI) contributions for the self-employed should rise from 9% on profits earned between £8,060 and £43,000 annually to 10%.

There would have been a further rise to 11% in the following financial year. NI of 2% is still payable on earnings above £43,000. None of these measures will now take place.

2% will still be payable by Higher rate (£45,000) tax payers but the 11% will remain at 9%

However, Class 2 NI contributions paid at a flat rate of £2.80/week by the self-employed on profits of more than £5,965/year will be abolished from April 2018.

The right way to approach self-employment

According to Office for National Statistics (ONS) data, the number of UK self-employed workers rose between 2008 and 2015 from 3.8 million to 4.6 million, with a 50:50 split between full-time and part-time. However, the largest growth was in part-time posts.

The ONS suggests that the recent growth in aggregate self-employment is partly related to workers now managing their retirement differently.

It adds that the age of both the full- and part-time self-employed has also increased considerably over the last ten years, with a trend for older full-time workers to transition to part-time work.

The ONS also reported a three-month fall in national unemployment figures to January 2017 down to 4.7% - the lowest since the summer of 1975. However, this was paralleled by a wage growth drop from 2.6% to 2.3%.

Institute of Fiscal Studies director, Paul Johnson, has warned that wages are unlikely to be much higher in the next five years; wage growth data is taken into account by The Bank of England in interest rate decisions.