While those moving to self-employment may lose several financial protections, it is essential to look at the overall picture and balance the pros and cons. There are particular challenges for self-employed people, but research and financial advice can help alleviate some of the pressures. So, where do we start?
Compare and contrast employee and self-employed status
Several financial protections are afforded to employees that are not available to the self-employed without additional costs. We have identified the specific costs/benefits and compared them against the situation for the self-employed. Putting these issues into context against the benefits of self-employment is essential.
Employer pension contributions
One of the more prominent financial protections lost for those moving into self-employment is an employer’s pension contributions. The introduction of workplace pension schemes has made a massive difference to employees. Under the current legislation, the minimum contribution is set at 8% of an employee’s earnings, with a minimum of 3% paid by the employer and the balance paid by the employee.
If we err on the side of caution and consider the average full-time wage in the UK is £30,000, even the minimum pension contribution of 3% from your employer equates to £900 a year. Then there is the potential long-term capital appreciation, which on £900 over ten years at 5% a year equates to an additional £600. So, the loss of an employer pension contribution should not be underestimated.
Sick pay
Currently, statutory sick pay stands at £109.40 a week and is available for up to 28 weeks, payable by your employer. As someone self-employed, you don’t have an employer; therefore, there is nobody to cover your statutory sick pay.
A recent survey by insurance giant LV found that just 6% of self-employed workers have income protection – providing a degree of income if they cannot work. There is also the option of taking out critical illness cover, which will provide an element of regular income if you cannot work due to severe illness or injury. Obviously, in the case of an employee, sick pay is covered by the employer, whereas someone self-employed will need to pay the insurance premiums themselves.
Death in service benefit
Interestingly, while many employers choose to take out death-in-service benefits for their employees, this is not a legal requirement. Occasionally, this may be linked to your pension plan or typically a stand-alone insurance policy which pays out on your death if the company still employs you. Typically, the proceeds would go to your family or named beneficiaries, although ultimately, this would be at the discretion of the trustees.
The equivalent of death-in-service benefits would be life insurance for the self-employed, another cost they would need to pay themselves. While there is no definitive figure, as a rough rule of thumb, life insurance should equate to 10 times the salary of the highest earner in the household. This type of cover should be part of your broader long-term financial planning.
Holidays
While not a direct financial protection, the ability to take holidays and still be paid is not an option for self-employed people. Many are forced to work long hours, and it is not necessarily the financial benefits but the physical and mental impact which can be most prominent. As a self-employed person, you must give yourself time for rest and recovery; otherwise, you may be more susceptible to injuries and illness.
Employee perks
In isolation, many of the traditional free employee perks may seem of little monetary value, but they can add up cumulatively. Some of the more conventional employee perks include:-
- Staff discounts
- Employee awards
- Discounted club memberships
- Social events
- Share options
This is a small selection of popular employee perks which need to be self-funded for those in self-employment.
Capital investment
As an employee, investment in information technology, staff, facilities and additional equipment is taken for granted; the employer covers that. As someone self-employed, capital investment will likely come from your savings or some form of finance. This can be a complex subject to balance, the need to retain funds while ensuring that your business is as efficient and up-to-date as possible. If you fall behind your competitors, there may be repercussions regarding contracts, income and, ultimately, profitability.
Tax returns
For every payslip an employee receives, there is significant work behind the scenes for the employer concerning the payment of tax, pension contributions and the production of a monthly summary. While online packages are available to help self-employed people manage their taxes, there is a cost in terms of paying for the service and time away from work, which is non-income earning. Whether an employer or self-employed, there is an element of working for the government free of charge to collect taxes.
Regular income
Typically, the value of regular income is not appreciated until it is no longer available. Your pay is set as an employee, and you will know how much to expect before you reach the month-end. If you are self-employed, you may have several core contracts which create regular income, but an element of your income may be unpredictable and volatile.
This can make planning challenging, and it will likely be an issue if applying for loans, mortgages or other types of finance. Lenders prefer to see a degree of stability in regular income. When working with self-employed individuals, they will err on the side of caution regarding loan amounts and income multiples.
Redundancy payments
The process and the compensation available are very different for employees compared to those for the self-employed. As an employee, you have specific protections concerning the process and the minimum amount of redundancy paid. As someone self-employed, unless you have a long-standing contract(s), if a client no longer requires you tomorrow, there’s not much you can do about it.
This is one of the issues uppermost in the minds of lenders when considering finance applications from self-employed people. Those who have a diverse client base are likely to be more successful than those who depend on a relatively small group of income streams. Whatever the situation, employees are undoubtedly more protected than the self-employed.
Training
An employer is legally obligated to undertake regular ongoing training for all employees. Those who fail to do so could face fines and, where there are accidents and injuries, be open to compensation claims. There is a cost to training, which many employees take for granted, something which can prove expensive for the self-employed.
Depending on the type of work, you may have several regular subscriptions to industry associations and training to undertake. These may be critical to give you a practical stamp of approval with customers in the future. Obviously, there is not only a cost to the training, but any time away from your core work is a time when you are not earning income.
Advice and guidance
As part of a team, very often, you will have advice and guidance to hand to assist with your everyday tasks. This is not something ordinarily available to the self-employed; they are potentially forced to pay for additional advice and guidance. Indeed, occasionally, you may be forced to bring in a third party to carry out work outside your skill set. While this would be factored into any contract charge, due to the competitive nature of the UK economy, passing on additional charges is more difficult than you might expect.
Benefits of self-employment
On the flip side, it is not all doom and gloom for those who prefer self-employment instead of employee status. Self-employment has many benefits, which should be balanced against the loss of financial assistance and protection as an employee.
High potential earnings
Employees are at the beck and call of their employers regarding salary and overall employment packages. As someone self-employed, you have the potential to enhance your earnings as a consequence of your growing reputation or simply putting in more hours. In theory, there are no limitations on your earnings potential, which is very different for an employee, although there is a degree of stability and reliability to consider.
Freedom
What price do you put on freedom? This is an age-old question that is difficult, if not impossible, to answer. While freedom must be balanced against work input and payment, there is an argument to suggest freedom allows you to maintain better mental and physical health.
Independence
Independence in business can be invaluable, allowing you to pick and choose your clients and contract durations and even pivot your business in challenging times. While the financial benefits will vary depending on the situation, if you have a good idea and it works, you will benefit, not an employer.
Flexibility
One of the main attractions for those looking towards self-employment is flexibility. This may include flexibility in working hours, where you work from and how many days a week you are available to your clients. There is also a need to balance flexibility with income and client needs against your personal preferences.
Work-life balance
Last but by no means least, there is the work-life balance argument, the move away from the typical 9-to-5 working day, matching diaries and spending time with your family. The financial repercussions of failing to find a suitable work-life balance can be significant regarding income and physical and mental wellbeing. Work-life balance is great in theory, but when under pressure, many self-employed people will go far beyond the typical working week. Pushing their physical and mental limits, with potentially disastrous consequences.
Summary
While those switching from employee to self-employment lose several obvious financial protections, it is vital to consider the wider picture. The most apparent financial protections are regular income and pension contributions, although this must be balanced by the degree of flexibility and independence to decide the future focus of your business and clientele. However, for many of those choosing self-employment, it is the lost financial protections of which they are most fearful.
We have worked with many self-employed people over the years, looking to protect income and assets, creating stable finances and the ability to look ahead confidently. Contact us today to speak with one of our team, and we can help you identify areas where financial protection may need strengthening and discuss the options available.
