What are the costs of being self-employed?

When you are self-employed, you will have to pay:

  • Income tax
  • Private insurance

  • More than that, the cost of being self-employed includes missing out on benefits that an employed worker is entitled to, such as:

  • Some state benefits
  • A pension fund
  • A self employed worker might also have more limited access to loans and mortgages.

Read more tips and info about the costs of being self-employed with Payday Loans Net.

Changing work practices and technological developments have meant that an increasing number of Britons choose to go it alone and become self-employed. Their reasons vary from a desire to be more independent to their family circumstances. Although many people are under the impression that the self-employed are raking the cash in, what is the reality for the estimated 5m self-employed workers in the UK?

From income to benefits and from insurance to mortgages, we examine all the hidden costs of being self-employed.

Costs of Being Self-Employed vs Income

How many times have you called out a self-employed plumber or mechanic in an emergency and had a shock at how much they charge? Most people then assume they must be making a mint.

However, research by the Department for Work & Pensions has shown otherwise. Excluding those who work part-time, statistics show that their earnings went down 30% from 2008-14. Their average annual earnings are actually half of a paid employee.

One of the problems that the self-employed have is calculating their fees or charges. If they don’t allow for all their costs (both business and personal), they struggle to keep their business afloat. It becomes challenging to award themselves a decent salary.

Income Tax for the Self-Employed

The same tax bands apply to both paid employees and the self-employed. However, without PAYE, the self-employed have to do a self-assessment tax return. Those on a low salary might not have the money to pay for an accountant. It becomes easy to make mistakes when they do it alone. You might think this means that they would pad their tax return with business expenses to pay less income tax. However, approximately 1 in 4 actually end up paying too much tax (compared to 1 in 10 who pay too little).

The Self-Employed & Entitlement to Benefits

Although the self-employed make National Insurance contributions, they aren’t entitled to the same state benefits as a worker. Statutory sick pay, annual paid leave and maternity leave are just some of the benefits that they miss out on.

Although they might be eligible for Income Support, Housing Benefit, Tax Credits (or Universal Credit in areas where it’s available) as well as reductions in Council Tax, they often find it more difficult to prove their need of financial support. They have to show that they’re trading on a commercial basis (with the aim of making a profit). They also have to prove that their work is structured, regular and ongoing. This means they must produce their business accounts and/or a business plan.

Private Insurance for the Self-Employed

3 out of 4 of the self-employed are sole traders or with one partner. Without sick pay and no employees to provide cover, what would happen if they fell ill or had an accident? To prevent an illness leading to the collapse of the business, the answer is to take out critical illness cover. However, 93% don’t have such a private insurance policy, and 4 in 10 said they didn’t see it as a financial priority. These people didn’t have other forms of self-insurance such as back-up savings either.

As for other private insurance policies to protect their business, half didn’t ensure the equipment they needed to keep their business going. For instance, laptops, tools, etc.

Pensions for the Self-Employed

Only a third of the self-employed said that they put money aside for old age. This means that many sole traders continue working well past retirement age because they can’t afford to stop working.

The UK is facing a £9.5 billion pension gap. Much of this is due to lack of forethought and legislation for the self-employed. The new workplace auto-enrolment schemes for paid employees have done a lot to ease the situation. However, some people believe that a similar system should be set up for the unemployed. They have recommended that the self-employed should pay automatic pension contributions of 4% unless they choose to opt out of the scheme.

The Self-Employed’s Access to Loans & Mortgages

Stricter lending criteria in the wake of the financial crisis mean that financial institutions give greater emphasis to the affordability of the loan. To calculate this, they look at income (in the form of payslips) as well as financial commitments. They take extra care to ensure the borrower will be able to repay the loan.

This can be more problematic for the self-employed when they want to take out a payday loans from direct lenders or a mortgage. Although the application procedure of High Street lenders has evolved to become more understanding, the self-employed might have less of a choice in lenders. In addition, they may expect to receive higher interest rate offers.

In order to evaluate their affordability, lenders would expect to examine at least 2 years of business accounts and sometimes their business plan. A long stable history of employment would also be taken into account before granting a loan or mortgage.

The hidden costs of being self-employed – Conclusion

Making the decision to become self-employed is often the best choice some people make. However, before taking the plunge, you should think about all the financial ramifications. It isn’t just the lack of job insecurity and the monthly fluctuations in income that you have to think about.

New business-owners spend an average of £9,700 setting up their venture and an average of just over 6 months to make all the plans. Self-employed workers have to pay income tax, private insurance and may end up losing out on benefits like sick pay and annual paid leave. Being self-employed also requires setting up your own pension plan. With greater thought and preparation to the issues covered in this article, self-employed workers can prevent paying more in the long run and relying on short term payday loans.

Tracy Walter
As a busy mother of 3, Tracy knows all about household finances. After completing her BA English Language and Literature at the University of Hertfordshire, she found an entry level job as an insurance agent and worked her way up. After the birth of her second child she left the insurance sector to work from home as a freelance writer. Tracy’s varied background in personal finance, writing and homemaking provide the perfect foundation for writing for the Payday Loan Net blog. Tracy loves nature, and weekends often find her with her kids at one of the many parks in the Barking area.

The article "The Hidden Costs of Being Self-Employed" was last modified on