Self-employment is an incredibly empowering way of working. For the independence it brings, and the brilliant work/life balance it offers, the number of self-employed in the UK has soared to close to 5 million.
But we should be careful not to get ahead of ourselves. There are many things to consider as part of this way of working. And more than that, there are barriers to be navigated. Some much larger than others.
The world of work today is more fluid and complex than it’s ever been. So we sat down to go through some of the rules, risks and rewards of self-employment in the UK, how they’ve changed, and how to steer through them.
Tax and self-assessment
One area which distinctly separates the self-employed from the employed is tax. And it’s a firm rule to abide by. Step one of self-employment is to register with HMRC, and guidelines for this can be found on the gov.uk site. An important fact - you must register within three months of trading.
Are you a sole trader, or should you be running a limited company or a partnership? You must decide at this early stage how you want to set yourself up.
Currently, the self-employed must file self-assessment tax returns after the end of the tax year in April (offline deadline: 31 October 2016, online deadline: 31 January 2017) but this will all change in a worryingly short amount of time.
The Government announced in March 2015 plans to overhaul the tax system in the UK, and they’re called ‘Making Tax Digital’, or MTD. It involves a vast change to the way things are run, and the self-employed are soon to feel the first effects.
The main sticking point is the move to quarterly updates rather than yearly tax returns. Government has promised it will be as simple as “checking data generated from record keeping software or apps and clicking ‘send’.” but we are not so sure.
At IPSE, we’re not necessarily opposed to what the Government is trying to achieve with MTD, but there are some problems which haven’t yet been addressed. For the self-employed and small unincorporated businesses, quarterly tax updates will be required from April 2018. From 2020 they will be required by all tax payers, including incorporated businesses.
On a recent FT Money podcast, Andy Chamberlain, IPSE Deputy Director of Policy, said the following on Making Tax Digital:
“[HMRC] has targeted the self-employed as one of the first to be part of this new [MTD] regime. We think this is a mistake. Bigger businesses have the resources to handle such a large change.”
“We are not completely opposed to this, but there are some issues. One thing is the speed at which they’re doing it… and the danger of making incorrect payments. Seasonal businesses in particular will suffer.”
To listen to the full podcast titled ‘Desperately Seeking Income’ head to the FT Money podcast website.
The part of tax called IR35 and why the self-employed need to know about it
For those that don’t know, IPSE was established in 1999 by a group of contractors specifically in opposition to IR35. So it’s really a bedrock of our organisation. Over the years we have adapted and evolved to represent all aspects of self-employment, but IR35 has remained a hurdle for many of the smallest businesses.
It’s important that those making attempts to avoid paying taxes correctly are caught, which is why IR35 exists. But it is far too complicated and often misleading.
A current Government proposal to change the way IR35 works in the public sector would see much of the contracting workforce in this sector disappear. Why? Because tax liability would be shifted to the client who would decide whether the contractor was caught by IR35 rules, and therefore what taxes they must pay. But if it’s deemed necessary that the contractor pay employment taxes, they will not receive employee rights and benefits, like sick pay.
To us, this doesn’t make sense. And will only serve to further complicate an already complex tax system. So far, IPSE has responded to the Government consultation, asked our members to write to and meet with their MP and hosted a Twitter chat, as well as holding several roundtables with industry leaders. We will also be hosting a Webinar on 1 November – find out more on our events page www.ipse.co.uk/events
We hope that in the first Autumn Statement speech from the new Chancellor, Philip Hammond, he takes the opportunity to reconsider pressing ahead with what would be a disastrous change to regulation of the way many contractors work.
Cash flow and savings
We can’t overlook the basics. Regulating the flow of cash in and out of bank account(s) is important, and it’s where a separate business bank account can make a real difference. Not only does this create a physical (and mental) barrier between cash, it can even help with identifying to HMRC that you are truly self-employed if the situation arises.
Business banking for the self-employed isn’t ideal these days, but watch this space for small ‘challenger banks’ increasingly coming up against the big banks in the future and providing flexible products.
Regulating your cash flow also means having savings for when the ‘in’ flows of cash are not as frequent, and this will happen at times.
As Nick Hill, Money Expert at the Money Advice Service, said: “we can all expect an unexpected bill or financial shock to strike at some point. The average unexpected cost of these financial shocks is £1,545 per year, with car repairs coming in at top of the list at an average of £1,341 a time.
“That’s why it’s incredibly important to build up a healthy savings buffer to cushion the blow of these shocks. Recent research by the Money Advice Service showed that around 40% of the working-age population of the UK have less than £100 in savings … huge numbers of people up and down the country are vulnerable to a financial shock that could send them into problem debt.”
All this is made far easier with an accountant. Although this is an extra cost, an accountant can save valuable time, energy, and provide peace of mind. Not to mention saving extra headaches when it comes to self-assessment deadline.
If you work as an employee, pensions are sorted for you and your contributions aren’t really on your radar, they just happen. If you work for yourself this doesn’t exist. Are the self-employed taking this obligation seriously enough? Recent data tells us no. So if you’re self-employed and reading this, take note.
As we mark four years since auto-enrolment started this October, NEST revealed that only 17% of the self-employed are saving into a pension. Meaning four out of five self-employed people are not saving for their future.
Debbie Gupta, Executive Director of Corporate Services at NEST commented on the data: “there’s a risk that millions of self-employed workers are getting left behind.”
“Saving a little bit each month can soon add up, particularly when you add on tax relief and investment returns. Pension savings, combined with the state pension can make a real difference to retirement. We all want to carry on doing things we love – whether that’s going out for dinner, trips to the cinema or maybe even a week in the sun. Having a pension could go a long way to helping achieve those aspirations.”
“The best laid plans of mice and men often go awry” so they say. And when you don’t have the backing of a larger company, there’s only you to rely on.
Or, as many have testified, you have your insurance plan to rely on.
Situations that can arise include: late payment from a client, a client not paying at all (see IPSE’s recent investigation into free work in the creative industries), illness or injury, jury service (which can last for much longer than you might think) and breaks of contract.
For the self-employed, it isn’t a case of just insuring your mobile phone or your travel, your way of work is subject to scrutiny and manipulation. Insurance is often a contractual obligation as well on projects. Read more on this from Thomas Wynne, Head of Business Development at Kingsbridge Contractor Insurance in the article 'How necessary is a website to running your business?'.
The pot of gold
That all sounds a bit tough you might be saying. But in actual fact, if you take things seriously when creating your business, it pays off. We’ve seen it. And the IPSE team offer support in all of the above areas, so you’re not entirely alone.
For the purposes of cash flow management, we offer contract reviews, debt recovery services and hold events on financial planning, as well as discounts with our partner accountancy providers – some of the best in the UK specifically for the self-employed. We also offer insurance between £500 per day for jury service, up to £10,000 for failed payments.
When it comes to tax, we lobby Government on ways to improve the tax system for the self-employed and on a more practical level members can access free tax and legal helplines and receive representation in a tax investigation. You can also get a pension scheme as an IPSE member with a superb negotiated charge of 0.43%. So there really are no excuses.
If this isn’t enough, there are countless guides and resources available through the website www.ipse.co.uk and you can join the community on social media or at our events. For a full list of IPSE Partners, visit our partners’ page www.ipse.co.uk/ipse-partners
New review to look at employment boundary lines
A lack of specificity in legal definitions, zero-hour contracts, employment tribunals against the likes of Uber and Hermes, all reveal grey areas of employment.
Some feel they are unfairly being labelled as self-employed and we should be wary of companies which tarnish self-employment in this way.
On 1 October Theresa May announced the launch of an independent review into “modern employment” and the hope is that this will directly address these grey areas.
Matthew Taylor, Chief Executive of the RSA, and leader of the review has said “The question isn’t how we reduce flexibility, but how we can make it work for more people.” It seems from what has been revealed so far, before the review is set to get underway, that Matthew Taylor is very much trying to establish work as a complimentary part of life. He wants to do away with injustices and target these grey areas.
At IPSE, we look forward to seeing this unfold and working with those involved in the review. It’s an opportunity to address some of the challenges faced that we’ve already spoken about such as pensions and professional development.
Compiled by IPSE Staff. For tools and guides, and more on what we can provide to members, visit the ipse website www.ipse.co.uk