The Transition from Employment to Self-Employed 

Starting a business

In recent years, more and more people are starting businesses or becoming self-employed with a variety of motivations. For some it is lack of availability of suitable work, others seek the flexibility that regular employment fails to offer and others who feel it is the only way to do the type work they really want to. In April 2012 the Office for National Statistics recorded an increase in the number of Self Employed works of 84,000 within a three-month period which is the highest rise since records began in 1992. At that time there were 4.2 million people in Self Employment. By 2014 15% of the workforce were Self Employed bringing the total up to a new record high of 4.6 million. In addition, the number of self-employed people aged 65 and over has more than doubled in the past five years.

Self-employment or starting your own business can be a way of using your knowledge and skills to earn money or turn a hobby or passion into a way of life. It also allows you to work flexibly and decide on your workload. For example, you may choose to work part-time or only during certain times of the year, if your venture is solid and bringing in enough income part time then you will most likely consider leaving your existing employment to focus full time on your Self Employed business.

Important things to consider

If you’re thinking about becoming self-employed or starting your own business, there are some important things to consider, especially if your aim is to leave your current employment.

1. Creating a business plan

This should have a careful estimate of anticipated income and expenditure over the first years of your business, based on your market research. You will need this if you have to seek a loan for your start-up costs and it will also be exceptionally useful as a reference point when deciding how best to structure your business, for example, as an employee you pay income tax and National Insurance as a deduction from your wage or salary, when you begin working for yourself you will then need to correctly calculate any tax due and you are then responsible for paying this to H.M. Revenue and Customs. Failure to correctly calculate, report and pay any tax due on time can, and will, result in penalties and surcharges being levied against you. You may consider at this early stage to seek the advice of a reputable Certified or Chartered Accountant who will be able to look at your personal circumstances to ensure you start on the right foot.

2. Financing your business

If you need to borrow money for your start-up costs, consider how much you require and where you will get it from. Banks may not be willing to lend money if you have a poor or no credit rating, or you have no collateral. This may not be an issue in the early days if your Self Employed work is on a part time basis and your current employment can support your day to day expenditure as well as your living costs, however, you will need to clearly evaluate the cash flow of your business before you hand in your notice.

3. Checking taxes and benefits

Make sure you seek advice about how becoming self-employed or starting your own business will affect your taxes and any benefits you receive.

4. Decide upon the structure of your business

Having found yourself an appropriate Accountant make sure you seek advice about the best legal structure for your business. There are many possibilities however the most common one is Self Employed, usually one person working for themselves. As a Self Employed person you own 100% of the profits within your business and are responsible for 100% of the tax payable on those profits even if they remain in the business bank account. If you are starting a business with one or more other people you may choose to structure it as a partnership. It is important to agree the management terms of the business with respect to the percentage split of profits, level of personal drawings and who is responsible for what. This is usually set out within a partnership agreement. When partnership accounts are drawn up the profits are divided between the partners and you will then be responsible for tax upon your share of those profits. Finally, you may decide to incorporate your business and trade as a Limited Company either alone or with others. This can often be highly tax efficient as a Limited Company is an entity in its own right. In the case of most smaller Limited Companies you would, as a Director, pay yourself a salary, you may or may not pay tax and National Insurance from this depending upon how much salary you allocate, this can then be ‘topped up’ with Dividends if the Company is within sufficient profit. Dividends for those earning below the higher rate of income tax would be tax free up to £5,000 and thereafter taxed at a lower rate than standard PAYE. The Company itself would pay Corporation Tax on its profits at a rate of 20% and is set to be reduced to 18% by 2020

5. Running your business

Start as you mean to go on! The key to keeping your business compliant is to ensure that you keep good business records. Few people in this day and age rely on complex books and ledgers but rather opt to use solid accounting software. This is a highly competitive market with a vast array of providers all claiming to be the best. In reality, there is no ‘one size fits all’ and it is strongly advised that you try out the demo versions before you commit to a specific package to make sure it suits your requirements.

Some of the key players include xero, quickbooks, freeagent and sage. All run a cloud based offering on a monthly subscription. There are also some good free options such as wave and quickfile.

Once you have all the key information and tools in place you will then be well positioned for the transition from employment to Self-Employment.

Auto Enrolment

Auto enrolment is a huge change in the employment landscape for UK businesses, yet many business owners and employers haven’t even heard about workplace pensions and have no idea what automatic enrolment is. It has long been recognised that most people are not saving enough for retirement and, as a result may not be able to afford to live comfortably in their retirement on just the State Pension. As people are also living longer, there is increasing strain on the State benefits system, so private pension provision is becoming increasingly important.

In order to encourage workers to start building up retirement benefits, pension reforms were introduced by the Government through the Pensions Act 2008 that requires all employers to offer workplace pension schemes and to enrol eligible workers into their schemes. These reforms have become known as automatic enrolment.

The reforms recognise that not all workers are eligible for automatic enrolment and that others, such as the self-employed, do not qualify. Provision has been made to allow those who fall outside of automatic enrolment to also join pension schemes and start building retirement benefits.

Automatic enrolment has been designed so that eligible workers who want to build up retirement savings don’t have to take any action themselves – employers will automatically enrol eligible workers into a workplace pension scheme and deduct any contributions that the member is required to pay from their wages or salary, and then pay into the pension scheme on their behalf.

What an employer must do

Your first step as a new employer should be to clarify your staging date. This is the date from which your Auto Enrolment reporting responsibilities will begin. You will need your employers PAYE References and details of your employee’s annual pay.

You will need to provide The Pensions Regulator with the contact details of the most senior person within your business as the nominated primary contact, you can also nominate a secondary contact. This should be someone who will be assisting in the implementation of the workplace pension in your business such as your payroll service provider or Accountant.

Auto enrolling your employees on time is vitally important and you should then submit a declaration of compliance to The Pensions Regulator. Employers must not try to coerce employees into not enrolling in the pension scheme.

This could be in the form of acting to discourage existing employees from auto enrolment or making it clear when hiring new employees that those who wish to be auto enrolled will be considered unfavourably.

Penalties for non compliance

If you do not comply with statutory notices, you may be issued with a fixed penalty notice. These types of penalties are set at £400.

The Pensions Regulator is also authorised to issue an escalating penalty. These types of penalties will vary depending on the number of staff you employ, for example, if you employ a high number of staff then the penalty will be much higher, with these penalties ranging from £50 to £10,000 per day.

The Pensions Regulator also have at their disposal an alternative the civil penalty. This penalty may be utilised if you fail to pay the contributions that you owe your staff when they contribute to their pension scheme. This penalty can be up to £5,000 for individuals, for example, business owners or managers. There can also be fines of up to £50,000 for the company itself.

The final option that The Pensions Regulator can call upon is the ‘Prohibited Recruitment Conduct Penalty Notice’. The severity of this penalty varies depending on how many staff are employed in the company and can range from £1,000 to £5,000.

The Pensions Regulator can and will initiate formal legal proceedings to recover penalties that businesses and employers have been issued with. Employers who are found to have breached their duties also face criminal prosecution.

Which employees need to be enrolled?

You will need to assess your employees to confirm who needs to be enrolled. The assessment can either be done manually or automatically using business software and will need to be carried out each time the workforce changes for example if a new employee joins or somebody has a birthday.

If you are using business software (for payroll, HR and pensions administration), this could be set up to automatically assess and monitor staff ages, earnings and pension contributions paid into a pension scheme both by members of staff and yourself. If you don’t, the table below shows how to assess staff based on their ages and how much they earn.

*State Pension Age

Employee has a right to join a pension scheme
If they ask, as an employer, you must provide a pension scheme for them, but you do not have to pay contributions into a pension scheme on their behalf.

Employee has a right to opt in
If your employee asks to be put into a pension scheme, you must put them in a pension scheme that can be used for automatic enrolment and pay regular contributions.

Employee must be enrolled
You must put these members of staff into a pension scheme that can be used for automatic enrolment and pay regular contributions. You do not need to ask their permission. If a member of staff gives notice, or you give them notice, to leave employment before you have completed this process, you then have a choice whether to enrol them or not. The employer also has a choice whether to enrol a director who meets these age and earnings criteria.

It is strongly advised that you take independent advice when setting up your pension scheme. You must bear in mind that most Certified and Chartered Accountants are not qualified as Financial Advisors and so whilst they may be able to help in the setting up and running of your Auto enrolment pension scheme they are not generally qualified to give advice concerning which pension provider you should use, in fact, unless they hold a suitable and current IFA qualification they would be in breach of the law in providing such advice.