Employed or self-employed – which is better?

Some say that if you want a really ruthless boss, you should work for yourself.

On the face of it, self-employment has lots of attractions: never having to ask for time off, choosing what work you do, flexibility and opportunity.

The reality, of course isn’t quite as rosy.

Being your own boss means the buck stops with you, and what you gain in freedom you may well lose in security.

There are good arguments on both sides of the employed/self-employed fence.

If you’re weighing up this choice, a lot will depend on your circumstances, such as your attitude to risk, your faith in your own ability and even your personal relationships and family situation.

We’ve done our best to set out the main advantages and disadvantages to help you decide.

Going self-employed

There are countless different ways to be self-employed. You can start your own business, work as a freelancer providing services to lots of different clients, or be a contractor (like freelancing, except you work for one employer for a set period of time).

You can also do any of these things at the same time as being employed by someone else – the ‘gig economy’ has arisen from large numbers of people providing services and goods in their spare time, usually online.

Being a part-time gig worker can be a step on the way to full self-employment, if it proves successful.

What are the pros and cons of being self-employed?

A move to being your own boss can mean gaining in some areas while losing out in others.

Here are the factors you’ll need to balance out when making your decision.

Income

Will you earn more, less or roughly the same when self-employed?

Freelancers in the UK earn an average of around £50,000 a year – but that’s a crude figure as it includes workers from lots of different industries at various levels, from junior web developers to senior management consultants.  

In general, you will earn more per hour working for yourself than you will as an employee. Where you may lose out is in the dependability of that income.

If you’re a freelancer or contractor you will inevitably have gaps when there is no work, and if you run your own business you may have periods of low or negative profits, which might reduce your income.

Consequently, you may find you’re always chasing work and putting yourself under pressure.

Tax

As an employee, you pay tax automatically through PAYE, so you don’t need to do anything unless you have other taxable sources of income.

By contrast, when you’re self-employed you take full responsibility for paying the right amount of tax.

You’ll need to keep accurate records of everything you earn during the year and all business-related expenses, and fill out an annual self-assessment tax return form.

If you run your own limited company, the company will also have to pay tax. If you freelance and get paid by your employer via your limited company, its worth considering how you can avoid IR35 tax legislation which is pencilled to come into effect in 2021.

Handling your own tax affairs can quickly become time-consuming, in which case it may be most efficient to hire an accountant.

Paid holiday, sick pay and maternity/paternity leave

Being an employee has many advantages that you may take for granted, such as paid holiday, paid sick leave and maternity/paternity leave.

If you want these when you’re self-employed, then you’ll have to arrange most of them for yourself.

If you’re employed, you are generally entitled to 39 weeks of maternity pay if you’ve worked for the company long enough.

If you’re self-employed, you can also receive some maternity income if you’ve been paying Class 2 National Insurance. When you’re planning a family, take this into account as you may be able to adjust how you work to be eligible for support.

As for paid holiday and sick pay, the only way to arrange for these when self-employed is to build up ring-fenced funds that you only use for these purposes. This kind of discipline can be tough, but it’s important if you want to have any time off.

Workplace pension

Yet another benefit of being an employee is having a workplace pension. It’s now a legal requirement for employers to enrol their workforce automatically onto a pension scheme.

Both you and your employer contribute to it, making it an extremely valuable benefit by the time you retire.

If you’re self-employed, you’ll need to set up your own private pension. This is one of the most overlooked pieces of financial planning among the self-employed, but one of the most essential.

You won’t be able to keep working forever, even if you want to, and other investments such as property don’t offer anything close to the tax advantages of a pension.

Setting up a personal pension should be a priority for you, or else you could use NEST. You may also want to increase your contributions to match the amount an employer might pay in.

A financial adviser can give you a pension forecast and recommend a level of contributions.

Work-life balance

The biggest perk of working for yourself is the flexibility to choose your working hours, take time off whenever you want and (perhaps) work anywhere in the world, if work is available.

This can make it great for managing your career around family life and personal goals.

At the same time, you’ll need to be careful that you’re not jeopardising your earning power.

If you take too much time off or work too erratically, then clients may come to think of your as unreliable.

Some self-employed people find they take less time off than they did when working for someone else!

If you’re looking for a better work-life balance but want the long-term security of being employed, speak to your boss.

You might be able to work the same hours but at different times of day – working 7am to 3:30pm, for example – and you could ask if it’s possible to work from home.

Flexible and home working is becoming increasingly acceptable and commonplace.

Long term prospects

One of the long-term aims of any employee is career development. It’s understood that you’ll want to progress and your employer should help you do this.

When you work for yourself it’s a bit different. Your career development will depend on the experience you gain and how you capitalise on it, for example by seeking bigger and more prestigious clients, or taking on more ambitious contracts.

It will be up to you to market yourself more proactively and make the most of your past experience – or else there is a danger of getting stuck in a rut, working at the same level for many years.

Ultimately, no-one will promote you unless you promote yourself.

There are plenty of ways you can help your career develop as a self-employed person, such as taking additional qualifications, building a strong portfolio, targeting prestigious clients to raise your profile, and branching out into new areas as your skills develop.

Mortgage applications

Securing a mortgage can be one of the real stumbling blocks of self-employment.

You’ll have to prove you’ve had a steady income for at least three years and you’ll need to have copies of your self-assessment tax forms (or company accounts) from the past two years.

You may also be offered a lower amount or a poorer deal, especially if there are gaps in your earnings.

This is where a good accountant can be a great help, as can a mortgage broker who specialises in self-employed mortgages.

Benefits

Basic earnings tell only part of the story. Depending on your employer, being an employee can bring other perks such as bonuses, help with childcare, free/discounted gym memberships, health insurance, company cars, bike schemes and so forth.

If you’re thinking of going self-employed, think about which of your current benefits you would want to keep, and work out how much they are worth in money terms.

Factor this in when calculating how much you’ll need to earn from self-employment.

Of course, you may be happy living without those benefits. Nevertheless, it’s important to bear them in mind when comparing an employee’s salary with a freelancer’s income.

Insurance

Employers are legally required to have insurance that covers them for if you get ill or injured because of work.

This in turn means they can afford to pay you compensation if you claim against them.

Some also offer a life insurance benefit for certain employees, which will pay out a lump sum to your family if you die while you’re working for the company.

When you’re self-employed, you won’t have these benefits. However, you can take some insurance out for yourself.

For example, personal accident and life insurance will help you and/or your family cope financially should something happen to you, and income protection will cover you if you can’t work for health reasons.

It’s also advised that you take out professional indemnity insurance to cover the costs if a client sues you for making a serious mistake. Remember to work these into your costings.

Job security

How secure will your job be as a self-employed person? Come to that, how secure are you as an employee? There are arguments to be made on both sides of this question, and ultimately only you will be able to decide.

There may sometimes be more security in working for yourself rather than for a big company that makes decisions over your head; conversely, being your own boss means you’re solely responsible for finding your next source of income.

Which works better for you may come down to your personality. If you find it easy to market yourself and are energised by the hunt for new clients, you may feel more confident in the driving seat than as a passenger.

On the other hand, if you prefer to focus on the work itself rather than on chasing business opportunities, being an employee may be far less stressful.

For more tips on being your own boss, check out our Starting A Business guide.