These days, more and more people are giving up traditional career paths in favor of more flexible self-employment options. Even those that don’t go that far often turn to side jobs as a way of earning more money while not engaged with their primary job. This is an especially common practice throughout the UK, where the number of self-employed individuals has risen sharply in recent years. Surveys have even confirmed that the self-employed are the happiest workers in the country, so it isn’t a trend that’s likely to go away anytime soon. For those still on the fence or getting ready to take the plunge, however, there are a few things that you should consider before you quit your day job that could affect your decision. Here’s what you need to know.
The first thing that many people don’t realize when considering self-employment in the UK is that you have to inform the tax authorities of your status fairly soon after making the decision. In fact, HMRC requires self-employed individuals to register by October 5th in their second tax year of being self-employed or they can face some hefty fines and penalties. The second thing to realize is that it is extremely critical to keep careful and accurate records of your earnings and expenses because self-employed individuals pay tax on their profits, not on their gross income. In other words, if you forget to deduct expenses, you’ll pay too much in taxes. Likewise, if you don’t chart all of your earnings, you could underpay and risk an aggressive response from HMRC.
Another thing to consider when deciding if self-employment is right for you is that you will become responsible for keeping your own head above water, come what may. That means you will need to build your own savings and try to save for retirement on your own since the self-employed aren’t included in any automatic pension schemes. It also means that even those that try to build their own pension plan won’t have an employer to match contributions, which makes funding your own plan more challenging. On top of all of that, you’ll also have to worry about what you will do if you face a major illness or any other life event that keeps you from working. At last count, 93% of the UK’s self-employed had no critical illness insurance, so they’re potentially one accident or sickness away from financial calamity.
Even when you’re working steadily and bringing in enough money to cover your expenses, you may be surprised at the myriad ways that self-employment can complicate your financial picture. In fact, you may be making more money than ever before when you work for yourself, but proving that to others can be tricky. For example, you’ll need to have at least two years of self-employment bookkeeping records to secure a mortgage, even if you’re earning plenty of money. If you can’t satisfy that requirement, you could end up having to settle for a specialty loan that will come with a higher interest rate. Then, you’ll also have to consider all of the small expenses you may have avoided while working on salary, such as free eye exams, gym memberships, and countless other perks you may have previously enjoyed. Those things can really add up and put a serious dent in your wallet that you weren’t expecting.
The Bottom Line
There are plenty of good reasons to consider self-employment. You can pick and choose your clients, work on causes you care about, and even make more money in certain lines of business. There are, however, all kinds of potential downsides to consider that might make a go-it-alone approach either unsuited or untenable for some. It’s important to weigh both the pros and cons before you make a decision, so you can go forward with the security of knowing what lays ahead. Now that you know where some of the pitfalls can be, you should be able to make an informed choice that will take you where you want to go – and with fewer surprises along the way.