Make the most of being your own boss

Make the most of being your own boss - Telegraph

Are you a micro-business? As a report by Lord Young last week stated, firms with fewer than 10 employees now make up 95pc of all businesses. Many are on a truly tiny scale – limited companies or partnerships with just one or two employees.

They are part of a growing trend towards self-employment in Britain, which is being fuelled by the older generation, as well as by many with young families. Figures from the Office for National Statistics show that those aged over 65 accounted for the largest number of self-employed people between 2008 and 2011, while the average age of a self-employed person is 47, compared with 40 for an employee.

Young parents are also starting many new businesses, prompting Mumsnet, the parenting social network, to launch a "WorkFest" focused on entrepreneurship for parents. "One of the perhaps unsung advantages of having babies is that it often gives women an opportunity to reset their career path or way of working," said Justine Roberts, the chief executive and co-founder of Mumsnet.

What both older workers and young mothers are finding is that self-employment offers a way to be flexible. For many over-65, consultancy work gives them a chance to wind down a little, while parents can work part-time when their children are small. For those made redundant in their fifties, self-employment can also be a survival strategy.

But becoming your own boss has its complexities, not least for personal finances. Employees who have never even filled in a tax form suddenly find they need to account for every penny, and are faced with a large tax bill at the end of the year. Recent figures from StepChange, the debt charity formerly called the Consumer Credit Counselling Service, showed that the self-employed were more likely to have debt problems than others. The charity found that average debt levels among its self-employed clients were 18.6 times annual income, compared with 4.1 among those in full or part-time work.

Delroy Corinaldi of StepChange said: "Self-employed people's business and personal finances are often closely intertwined, and, as they use credit to invest in and support their enterprises, it can leave them particularly vulnerable to problem debt."

However, there is a more glamorous side to self-employment. Celebrities such as Fiona Bruce, Jeremy Paxman and Chris Evans, as well as many Premiership footballers, operate through a limited company because they have a number of business interests. Those with limited companies often pay less tax. This is because corporation tax is lower than the tax paid by individual taxpayers in many cases.

"The self-employed have great flexibility," explained Mike Warburton, a tax specialist from accountants Grant Thornton. He said the main advantage for the self-employed was that they could pay themselves a low salary, equivalent to the tax-free allowance for individuals. They could then pay the rest of their income as dividends, which are effectively tax-free after corporation tax, up to the higher-rate tax band. The dividend payment avoids some National Insurance contributions, too, while costs, from mobile phones to computers and vehicles, can be paid for by the business.

In some cases, the self-employed can keep any extra money in the business until they wind it up and withdraw it. However, setting up a new company soon after this in the same line of work could be regarded as tax evasion.

In addition, the taxman is looking more closely at those who set up a company and obtain tax advantages when they are really employees and have only one client. "HMRC supports a flexible labour market and will support those who wish to comply with their tax obligations," a spokesman said. But he added that the taxman "will challenge those who seek to avoid their obligations, including by seeking to present an employment relationship as self-employment".

Recent figures discovered by Bloomsbury Professional, a specialist tax publisher, show that HMRC is stepping up its investigations into the self-employed. The figures showed an increase in investigations under "IR35" legislation, which allows the Government to tax freelancers e_SEnD who may work using "personal service companies" e_SEnD as though they were disguised employees of their clients.

IR35 is designed to prevent freelancers paying lower tax rates and NI on earnings when HMRC thinks they are really employees. Bloomsbury's figures show that 193 investigations were opened into such abuses in the seven months to October 2012, compared with just 12 in 2009/10. Martin Casimir, managing director of Bloomsbury Professional, said: "IR35 is very problematic as it adds unnecessary complication to the tax system and makes it hard for ordinary contractors to work out their tax bills. Freelancers and contractors have the added complication of HMRC breathing even more closely down their necks."

For legitimately self-employed people, though, there are a variety of ways of minimising tax. As well as paying dividends and a low salary, those with a limited company can pay pension contributions and life insurance from their company, issue childcare vouchers and keep their annual earnings below £50,000 to avoid a cut in child benefit. Thanks to technology there are now more ways to keep track of all this, with online accounting services that show your tax liability throughout the year.

Andrew Halgryn of Boox, an online accountancy group, said freelance working now covered some surprising professions. "Many of our clients are social workers. They're very good at being social workers, but they don't need to be very good at tax." Britain's army of the self-employed, he argued, will need good accountants, especially as they can offset costs against profits.

For more on how to make the most of self-employment, see Action Points, right.

Goay Joe Lie

Director of Joe Lie Beauty And Cosmetics