At present, around five million people in the UK – or 15% of the total workforce – are self-employed. Do you like the idea of joining their ranks? With a new year and a new decade on the horizon, now could be the perfect time to take the plunge and switch to a life of self-employment.

While there are a whole host of benefits to leaving behind the world of fixed employment. Working for yourself comes with its own challenges, too. It’s important to familiarise yourself with all aspects of the self-employed lifestyle. Including what you need to know before committing to the switch and information surrounding the self-employed tax changes in 2020.

Fortunately, this handy guide is here to equip you with all you need to know before making that all-important self-employed change. 2020 could be your most exciting professional year to date!

Is self-employment right for you?

First things first – why would you want to be self-employed? Before proceeding any further with your decision, you should weigh up the benefits and drawbacks of the lifestyle.

Pros of self-employment

There are many reasons why people choose to take their professional lives into their own hands, including:

  • You are able to choose who you work with and which contracts you accept. Giving you complete control over your workload.
  • As well as picking which work you do, you’ll also be able to decide when and where you’ll do it. Allowing you to fit your schedule around other aspects of your life, such as childcare or holidays.
  • Many self-employed people work with an array of different clients on a number of different jobs, satisfying their need for variety and creativity.
  • Depending on the sector in which you work, you may be able to charge significantly higher hourly or daily rates than salaried employees.
  • As a self-employed person, you may be able to claim tax relief on a wide variety of expenses. From food and travel to office space and equipment.

Cons of self-employment

The flipside of the arrangement also involves a few unpleasant but often inescapable consequences of self-employment. These include:

  • Those who are new to the world of freelancing may find it difficult to establish a customer base from the outset.
  • Any new business is likely to incur start-up costs. This means you’ll need to set money aside to get the ball rolling and sustain yourself when work is at a premium.
  • Job security. Self-employed people do not often have reliable incomes from month to month and suffer precarious job security.
  • Statutory benefits. Since you’re not employed, you won’t be able to access sick pay, holiday pay, pension contributions or paternity or maternity leave from your employer.
  • Credit rating. Those who are self-employed may find it difficult to receive approval for a mortgage or loan, especially if they are only just starting out.
  • Those who manage their own time often find it difficult to maintain clear delineations between their professional and personal life.
  • If you’re not working as part of a team, you might find that your human contact suffers.
  • When self-employed, you’re required to keep detailed records of all invoices, payments and expenses. As well as file your own tax returns.
  • New self-employed tax rules for 2020 mean that even those working in the private sector are potentially liable for IR35 regulations, meaning you may be required to pay a far higher amount of tax.

Self-employed tax changes in 2020

As mentioned above, the coming year will see the introduction of new rules regarding self-employed people. In April 2017, IR35 legislation was amended so that the end client in any public sector professional relationship was held responsible for determining whether the contract fell “within” IR35. This resulted in many public sector firms adopting a “better safe than sorry” policy by regarding every contractor they worked with as liable for IR35. In turn, this meant significantly reduced earnings and fewer opportunities for countless freelancers across the UK.

To make matters worse, the government is planning to introduce more self-employed changes. 2020 will see IR35 expanded to include all private sector contracts as well, meaning that as many as 170,000 more contractors throughout Britain could find their earning potential significantly hampered by the roll-out. For that reason, it’s a good idea to assess your own circumstances (perhaps by contacting a professional to provide insight) before deciding if you want to become self-employed – and most crucially of all – how you are going to do it.

Options for self-employment

When considering a career of self-employment, there are generally three routes you can take. These are as follows:

Sole trader

Those operating as a sole trader must register with HMRC as self-employed to inform the body that they will be liable for paying income tax and Class 2 and potentially Class 4 national insurance contributions (NICs). Sole traders must keep detailed records of all of their business transactions and file their tax returns on time, but the workload involved in doing so is generally less than as a limited company. However, the disadvantage of operating as a sole trader is that you will be personally liable to pay any debts if the business fails or goes bankrupt.

Limited company

For those earning above a certain threshold, it may be more advantageous to set up a limited company and pay yourself a salary (alongside yearly dividends, if applicable) than pay income tax as a sole trader. This was certainly true prior to the introduction of IR35, but the new self-employed tax rules in 2020 make limited companies a much less attractive proposition than they once were. Additionally, limited companies generally involve a higher workload in terms of accounting and fulfilling your tax obligations than sole traders have to deal with.

Umbrella company

A third alternative to the two options above is joining an umbrella company, who will take you onto their payroll. In this manner, you effectively become an “employee” of the firm and therefore IR35 will not apply to you. You’ll also receive all of the statutory benefits listed above and won’t have to deal with any of the cumbersome paperwork related to tax returns, or even chase payments from your clients. Instead, you’ll receive a weekly or monthly wage from the umbrella company, who will deduct your tax, NICs and their own fee from it. Meanwhile, you’ll still retain all of the benefits of being self-employed listed above.