As each year passes more and more people in the UK choose to become self-employed. According to the Institute of Fiscal Studies 14% of the UK working population were self-employed in 2019 compared to just 8% in 1975. While there are some clear benefits to being self-employed there are also some disadvantages. In this article I’ll explain the pros and the cons of self-employment. Maybe you’re thinking about taking the leap? This might help you to make that decision.
As the author I must declare some personal experience. As Mrs Mummypenny, a personal finance expert and PensionBee ambassador, I’ve been self-employed since 2015. Before that I spent 16 years employed for large companies earlier in my finance career.
The pros of self-employment
A chance to follow your passion
Everybody has something they’re passionate about, that lights up their life and fills them with joy. Setting up your own business can channel that passion into your everyday allowing you to make an income from it. What could be better than earning money from doing something that you love?
Some of the happiest people have turned their life passion into their business, from writers to cake makers, from fashion designers to therapists. It means every day they wake up motivated and happy to do what they do. The mental health benefits of this alone are huge.
Freedom and flexibility
Self-employment means freedom and flexibility. As a self-employed person you’re the boss, you answer to yourself with no one telling you what to do. Your hours can fit flexibly around your life, if you want to work a four-day week you can, and if you want to work at 2am you can!
The flexibility often means that self-employment suits those with a busy family life, working business hours around the children. It can also mean that you can work from home or from any location, particularly if your work is internet based.
The financial rewards are unlimited
The financial rewards of self-employment are unlimited. Grow your business in the right way, and the turnover will grow and grow. It’s entirely up to you how big your business gets. There comes a point of expansion where outsourcing is required for more growth, but it’s entirely your decision how big or small your business becomes.
Claim for all allowable expenses to reduce your tax bill
Running your own business means that you’re responsible for all of the financial record keeping. Including a vast array of allowable business expenses. These are subtracted from your income to calculate your profit, on which tax is paid. There are many allowable expenses (including your pension contributions if you’ve set up as a limited company!) that can help to reduce your tax bill, full information can be found on the gov.uk website. If you haven’t set up a pension yet PensionBee has just launched a flexible self-employed pension. And if you have other pensions, which you’re no longer contributing to, you can also combine these together in a PensionBee plan.
The cons of self-employment
It’s hard work and takes time to build a successful business
There’s no denying that running your own business is hard work, and you get out what you put in. The first couple of years of any business are especially hard work. The hours of promotion, organisation and dedication feel endless to get your business to a point of financial viability.
Many businesses fail in their first two years, with business owners underestimating the amount of work required to generate cash flow. No business can survive without a positive cash flow.
Having to do everything yourself
As a self-employed person you’re responsible for everything: all of the book-keeping, admin, sales, marketing, legals, design, IT, negotiation. The list goes on and on. Much of this can be outsourced, but only when there’s sufficient income or the desire to do so. It can sometimes feel like there’s a never-ending list of tasks to be completed, many of which can get in the way of the core of your business, but alas must still be done!
No employer pension contributions
One of the biggest benefits of employment is a pension that not only you contribute to but also your employer. The minimum contribution is 5% from you, and your employer will top this up by 3%. Many employers offer more than this and will increase their contribution if you do as well.
As a self-employed person the only contributions to a pension are made by yourself. There’s no extra bonus from an employer. But there are the same tax benefits for the self-employed, a contribution as a lower tax rate paying self-employed person means that your pension provider will claim for the extra 25% tax top up so for every £100 you save, an extra £25 will be claimed. If you have a limited company the pension contributions from your business bank account are usually treated as an allowable business expense.
No holiday and sick pay
Any time off from your business will be unpaid unless you have an element of passive income generation. This often means that you never switch off and always do that little bit of work, even when away on holiday. The same applies to sick pay, if you’re ill, any time off will be unpaid.
There’s an insurance called ‘income protection insurance’ that will help in the case of long-term sickness for the self-employed. This insurance will cover your essential income if you become so ill that you can’t work. It normally kicks in after a period of time you determine, normally when your emergency money runs out.
Is going self-employed worth taking the risk?
In my humble view, absolutely! I’m beyond grateful for Mrs Mummypenny and the life and opportunities it has given me. How else could I have become a PensionBee billboard model?!
Lynn Beattie is a PensionBee customer and CEO/Founder of Mrs Mummypenny, a personal finance website. She is also an ACMA management Accountant, previously working in commercial finance for Tesco, EE & HSBC. Lynn is a single mum to three boys, living in Hertfordshire, and is the author of ‘The Money Guide to Transform Your Life‘ published in September 2020.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.