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What is Self Employment?

By: J.A.J Aaronson - Updated: 13 Jul 2010 | comments*Discuss
Self Employment Employee Employed Tax

An increasing number of people are becoming interested in the idea of self employment. The recent downturn has encouraged some people to reconsider their situation, with many preferring to work for themselves than to risk redundancy.

But self employment is a complex and often misunderstood topic. A concerning number of people leap into self employment without properly considering the consequences, or understanding the demands that this entails.

So what is self employment, and how does it differ from conventional employment?

Self Employment Basics

Self-employed people work for themselves, rather than for another business. Instead of earning money by working as an employee of another company, you derive your income directly from your own skills – by providing these to clients and customers.

Business owners are often self-employed, but self-employed people are not necessarily business owners. You do not have to incorporate a company or partnership in order to be self-employed; instead, you can operate as a sole trader. You take sole responsibility for your work, and you are the sole recipient of any profits.

Self-employed people choose when and where to conduct their work, and for which clients. The ability to choose your own hours and place of work is a key benefit that draws many people to self employment.

But there are also downsides. Self-employed people do not enjoy any of the security of employment. Things like redundancy pay, holiday time and sick leave are all the preserve of employees, and are not available to the self-employed.

Tax Implications

Self employment also has a range of important tax implications. Rather than paying tax through the Pay As You Earn (PAYE) system, self-employed people are generally required to use the Self Assessment process. In practice, this means that they are required to pay their taxes directly to HM Revenue and Customs, and fill in an annual tax return.

In many cases, though, self-employed people receive more favourable tax treatment than conventional employees. They can offset business expenses against their taxable income – a vitally important tool for keeping tax bills down.

The responsibility for tax payments often puts people off self employment. Indeed, this can cause problems for some, particularly in the event that a particularly profitable year is followed by a significantly less profitable one. That said, as long as you keep on top of your tax, and make sure that you put aside enough money to pay your bill, this should not cause you too many difficulties.

Am I Self Employed?

Determining your employment status can be tricky, particularly if you have a number of different income sources. But it is important that you know whether or not you are self-employed, as this will have significant implications for your tax and legal treatment.

If you are confused as to your employment status, you may wish to read the checklist elsewhere in this section; it will help you to decide whether or not you are already self-employed.

Entering self employment is a big step, particularly if you have not worked for yourself before. If you are in any doubt, you should speak to an accountant.

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