There are over 4 million self-employed in the UK and with the gig economy rising this is only set to continue to rise. Ensuring you have the correct setup for you is important, from registering as a sole trader to setting up your own private limited company.
There are key differences in the perks of each and the levels of protection you’ll benefit from. So taking the time to ensure you’ve chosen the correct setup for how you want to trade and live your life is important.
What is self-employment?
Contrary to popular belief, going self-employed doesn’t always mean setting up a business. You can work in many different capacities such as a freelancer, tradesman, or consultant by being set up in the sole trader category.
Alternatively, you could create a private ltd business, be a director of it and then employ yourself too in order to ensure you meet the requirements for national insurance and your pension contributions.
Some companies now are taking people on in self-employed contracts too where you arrange your own tax deductions, sick pay, and holidays. You won’t have the safety or the commitment of a full-time employee-based contract. This can work quite well for short-term arrangements or project-based work.
Why do people become self-employed?
There are many reasons for becoming self-employed but freedom and flexibility seem to be the most popular. It’s not always a given that those who are self-employed outearn their traditionally employed counterparts.
Many become self-employed because they can:
- Manage their own time and have more flexibility
- Run their own business their way
- Manage the amount of business they have and who they work with
- Do something they are passionate about
- Potential to earn more than when in a comparable salaried employed role
- Work from home or remotely
What are the cons of being self-employed?
Becoming self-employed is a huge decision and can take you away from the traditional sense of job security that some people thrive on.
There are some things to consider before taking the plunge:
- Most businesses require startup costs
- Income is never guaranteed so careful if you have a mortgage or financial ties
- Being self-employed can be isolating if it’s just you
- You have to build a client base which can take time
- You will probably end up working lots of hours on business admin
- Work-life can impose on home life, especially if you work from home
- You take responsibility for the highs and lows of the business
- Admin, accounting, bookkeeping, and chasing late payments
- Organising insurance, pay, and tax
- You don’t have the right to get paid if you can’t work or take a holiday
- You have to comply with the legal regulations
Working for yourself as a ‘sole trader’
You may be classed as self-employed or a sole trader if you meet the following criteria to ensure you have set up the correct structure and are paying tax:
- Run your own business where it’s only you working for yourself
- Have several customers or client contracts at one time
- Can contract other people to help you do the work for you at your own expense
- Provide the items you need to do your job
- Charge an agreed price for your products and services
- Sell goods or services to make a profit
When should I set up a Ltd company?
Setting up a Ltd company means you are classed as the ‘owner’ of a business and an employee. You become a director of the business and can also create employment contracts and opportunities for other people, but you become liable for them as an employer.
Many of the above points can apply if you own your own Ltd company, but the legal entity is different and the regulations you need to follow are too.
Key differences between a sole trader and Ltd company
Ltd company set up involves:
- Registering with companies house
- Appointing a director and other appropriate roles
- Drawing up a memorandum of association
- Paying corporation tax
Sole trader set up involves:
- Inform HMRC you’re self-employed
- Check mortgage or tenancy so that you can work from home if needed
- Create a process of recording finances and administration
- Set up a business bank account
- Purchase insurance
- Consider your pension