Is Self-Employment or PAYE Better?
There are many factors to consider when making the decision between working as a PAYE employee (Pay as you earn) or self-employment. Here at CIGMA Accounting, we have an extensive amount of experience with clients seeking advice around this topic.
When deciding which choice is best for you, you should consider aspects such as tax efficiency, benefits and personal non-financial factors. CIGMA Accounting offers analysis and expert knowledge to help you make an educated decision.
An individual is classified as self-employed when they are working for themselves. Self-employed individuals run a business for themselves and take responsibility for its successes or failures. They can keep all business profits after tax is paid.
An individual is classed as an employee when they have entered a contract of employment. To gain employment status, the contract will state that the employee will do work or services for a personal reward. This reward can be money or a sort of benefit. An example would be the promise of a contract or future work.
Different Approaches to Tax
A crucial difference between self-employment and being on a company’s payroll is the way in which the taxes are paid. When an individual is self-employed, income tax is paid once work-related expenses have been deducted. Depending on each individual case, class 2 and 4 National Insurance contributions may need to be made. Majority of self-employed individuals are required to complete a Self-Assessment tax return annually.
Conversely, employees are taxed automatically through the PAYE system and make class 1 National Insurance contributions. An employed individual will usually not be required to complete a Self-Assessment but if certain conditions are met, they may be required to complete a Self-Assessment. If an employee on a PAYE job earns over £100,000 or earn additional untaxed income, they must complete a Self-Assessment. A common example of this is income from rental properties. You must pay tax on the profits.
As employees’ tax is paid automatically through the PAYE system it reduces human error and requires less manual effort of the employee. In comparison, self-employed individuals will have to complete a Self-Assessment to pay their tax liability. At an expense, sole traders will often hire professionals to complete the self-assessment as it is time consuming, meticulous to complete and you must have a vast amount of knowledge to be the most tax efficient.
A self-employed individual can claim expenses for certain items if it relates to their business. These include laptops, phones and vehicle-related costs. For this claim to be accepted and treated appropriately, the expense should strictly be for business use. However, employees will usually only be allowed to claim expenses when they have purchased something that was necessary for their work and was not reimbursed by their employer. All expenses that are claimed must have a receipt.
To read more on expenses, please see our blog on “What is an allowable expense?”.
Employment Benefits and Rights Compared to Self Employed
All employees of a company are entitled to rights which include national minimum wage, paid holiday, statutory sick pay, protection against unlawful discrimination, workplace pension, social security, workers compensation and job security. However, being an employee means that you are required to work regularly, do a minimum number of hours and you are not able to send someone else to do your work.
Self-employed individuals tend to have more independence, freedom, work-life balance and additional tax deductions. Although sole traders have more independence, the lifestyle comes with the cost of having more responsibilities regarding the business. They are responsible for finishing any work in their own time, being personally liable and have tax planning limitations.
Employees often tend to have a more predictable income in comparison to sole traders. Employees must sign a contract with the employer which states that the employer must pay their staff an agreed amount of money. On the other hand, self-employed individuals will have a more unpredictable income as it depends on the current state of the market and consumers. These changes can influence the income of the sole trader positively or negatively.
Non-Financial Incentives for Self Employed and Employee
In order to determine whether being self-employed or an employee is more beneficial, you should consider all factors. Non-financial incentives can help to determine which choice suits you best. We have laid out the main non-financial incentives for both career paths.
- Independence: When you are your own boss you get to decide what work you take on, how you present it and who you want to work with. How you spend your time is up to you.
- Follow your passion and interest: You get to pursue what interests you and do what you love. The amount of work you put in and the success that is produced is entirely up to you.
- Maximise potential and skills: Being able to work at your own pace allows you to maximise your potential and skills to improve how you complete your work.
- Flexible lifestyle: Life outside of work is something that is usually something that is neglected and put as a second priority. When you can control your work hours, you can weave in your personal life as you see fit which gives you more freedom to do the things you want to.
- Office interference: Work life in the office can be stressful when you have co-workers who bring their complications to the workplace. Working alone eliminates the stress of dealing with that and allows for you to fully focus on the task at hand.
- A clear career path: A clear career path can give you a sense of accomplishment and a goal to strive for. These incentives can help you to aim higher and push further for the next achievement.
- Rewards and recognition: Being recognised and rewarded by your peers for your achievements is a reward which is exceptionally gratifying.
- Job security: One of the main benefits of being an employee is that you have a bigger safety net than someone who is self-employed. When you sign a contract with your employer it will outline your responsibilities and rights which will make it clear on what you should do to maintain your job.
- Co-workers: Being able to socialise and talk to people allows for the opportunity to make friends and network with those you work with.
Our CIGMA Accounting Suggestion
Deciding the choice between an employee or being self-employed is complex and will be dependent on each individual case. Ask yourself, are you looking for a clear-cut proven career path? Do you want to beat the ‘Tax-Man’ and claim back expenses? Do you enjoy socialising with co-workers, or would you prefer independence? Thus, it’s important to consider all factors and the results it entails. We here at Cigma Accounting can provide you with advice and inform you of ways to save money.
If you require assistance to do so, please do not hesitate to get in touch.