No holiday pay, no pension, no sick pay. That's freedom

New workforce: people who think there's more money in freelancing should look at all the angles

You have been in the same sort of job for many years. It is a responsible position and you are earning a respectable salary of pounds 30,000. But you are bored. And when you hear that a former colleague who was made redundant a couple of years back is now pulling in pounds 50,000 as a freelance, you wonder why you don't take the plunge yourself.

It is quite common for people who turn to self-employment to see a significant rise in their earnings. Indeed, the possibility of making lots of dosh is often part of the motive to go it alone.

But the self-employed should be looking for an increase in earnings simply to maintain the same standard of living and financial benefits as those available from a salaried position. They should also be looking at compensating for the extra risk they take; the risk that things could go wrong.

Business expenditure is one aspect worth reviewing. It is often said that the self-employed have tax advantages over employees taxed under PAYE because of their ability to claim tax-deductible expenses. But the self-employed also have to spend money on things with which an employee is provided by the employer. It is a misapprehension to assume being self- employed allows you to go on a tax-avoiding spending spree. Tax-allowable expenses still cost something. A pounds 100 of expenses simply means pounds 100 of income that can be exempted from tax. A higher-rate taxpayer can escape pounds 40 of tax otherwise payable. But the item still costs pounds 60 (ignoring any additional ability to reclaim VAT).

Depending on the nature of work, the self-employed person grossing pounds 50,000 might spend pounds 5,000 (before tax relief) on business costs and on capital expenditure - items such as computers, for which tax relief has to be phased over several years. Capital expenditure is rarely a once-and-for all cost. The chances are that changing needs and technology will fairly soon require further outlay.

An employer's pension scheme can be valuable. Salaried people might typically pay 5 per cent of pay into a pension scheme. But the lion's share is usually borne by the employer. It is difficult to put a figure on how much a self-employed person would have to pay into a personal pension plan to get an equivalent pension. But 15 to 20 per cent of gross earnings may not be wide of the mark.

National Insurance paid by the self-employed, unlike that paid by the employed, does not build up entitlement to the earnings-related part of the state pension, called Serps, nor to unemployment benefit, should work ever dry up. A self-employed person has to fund his or her own redundancy. If you are a professional person in your 30s or 40s you may know several people who have received tax-free lump sum payments as a result of redundancy, it is common in the job-insecure 1990s. The self-employed person will never benefit from such a windfall. It is hard to quantify the worth of an entitlement to redundancy, but it is an extra to consider.

You may be in rude health and never have to take a day off sick. But there is always the chance of a serious illness that could put you out of action for weeks or months. Many employers still have generous sick- pay schemes. By contrast, the self-employed have to fund their own days off through what is called income protection or permanent health insurance. A quote from Norwich Union for a non-smoking professional male aged 35, who drives 20,000 business miles a year and grosses pounds 45,000 a year after business expenses, puts the annual cost at pounds 732, and that is for a policy that pays out a sum equivalent to the lost income but only after three months of illness. A higher-rate taxpayer would need to gross pounds 1,220 to pay this pounds 810 premium.

There are other benefits an employee may get that the self-employed person may want to replace. If, as an employee, you have a company car, how much would it cost to run your own? Does your employer provide free life insurance, cheap meals, or a share option scheme?

Finally, if you are self-employed, have you ever been delighted at how you can earn a big fee for just a few hours' work? In fact the fee may not appear so good once you take account of any time you spend on work- related matters for which you do not get paid - general administration, travelling and so on. You might be earning good money only by putting in a lot of hours. A typical employee works seven hours a day for 225 days a year, once annual leave and bank holidays are taken into account. Anyone considering self-employment should also ask if they could earn, say, pounds 50,000 by putting in just those hours.

PROMOTED VIDEO
Sport
David Moyes gets soaked
sport Moyes becomes latest manager to take part in the ALS challenge
Life and Style
techCould new invention save millions in healthcare bills?
Voices
A meteor streaks across the sky during the Perseid Meteor Shower at a wind farm near Bogdanci, south of Skopje, Macedonia, in the early hours of 13 August
voicesHagel and Dempsey were pure Hollywood. They only needed Tom Cruise, says Robert Fisk
News
peopleEnglishman managed quintessential Hollywood restaurant Chasen's
Life and Style
food + drinkHarrods launches gourmet food qualification for staff
Arts and Entertainment
Michael Flatley prepares to bid farewell to the West End stage
danceMichael Flatley hits West End for last time alongside Team GB World champion Alice Upcott
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
News
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
i100
Life and Style
Black Ivory Coffee is made using beans plucked from elephants' waste after ingested by the animals
food + drinkFirm says it has created the "rarest" coffee in the world
Arts and Entertainment
Jamie T plays live in 2007 before going on hiatus from 2010
arts + entsSinger-songwriter will perform on the Festival Republic Stage
Life and Style
food + drinkThese simple recipes will have you refreshed within minutes
News
Jermain Defoe got loads of custard
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Business Analyst - Banking - London - £550 - £650

£550 - £650 per day: Orgtel: Business Analyst - Traded Credit Risk - Investmen...

Data Centre Engineer - Linux, Redhat, Solaris, SAN, Puppet

£55000 per annum: Harrington Starr: A financial software vendor at the forefro...

.NET Developer

£600 per day: Harrington Starr: .NET Developer C#, WPF,BLL, MSMQ, SQL, GIT, SQ...

Data Centre Engineer - Linux / Redhat / Solaris / Puppet / SAN

£65000 per annum: Harrington Starr: A financial software vendor at the forefro...

Day In a Page

All this talk of an ‘apocalyptic’ threat is simply childish

Robert Fisk: All this talk of an ‘apocalyptic’ threat is simply childish

Chuck Hagel and Martin Dempsey were pure Hollywood. They only needed Tom Cruise
Mafia Dons: is the Camorra in control of the Granite City?

Mafia Dons: is the Camorra in control of the Granite City?

So claims an EU report which points to the Italian Mob’s alleged grip on everything from public works to property
Emmys look set to overhaul the Oscars as Hollywood’s prize draw

Emmys look set to overhaul the Oscars as Hollywood’s prize draw

Once the poor relation, the awards show now has the top stars and boasts the best drama
French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

The ugly causeway is being dismantled, an elegant connection erected in its place. So everyone’s happy, right?
Radio 1 to hire 'YouTube-famous' vloggers to broadcast online

Radio 1’s new top ten

The ‘vloggers’ signed up to find twentysomething audience
David Abraham: Big ideas for the small screen

David Abraham: Big ideas for the small screen

A blistering attack on US influence on British television has lifted the savvy head of Channel 4 out of the shadows
Match of the Day at 50: Show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition

Tom Peck on Match of the Day at 50

The show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition
Air strikes? Talk of God? Obama is following the jihadists’ script

Air strikes? Talk of God? Obama is following the jihadists’ script

The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
Ebola outbreak: Billy Graham’s son declares righteous war on the virus

Billy Graham’s son declares righteous war on Ebola

A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

Not even Jeremy Clarkson is bigger than the BBC, says TV boss

Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

Nick Clegg the movie

Channel 4 to air Coalition drama showing Lib Dem leader's rise
Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

Philip Larkin: What will survive of him?

Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?

Waxing lyrical

Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?
Texas forensic astronomer finally pinpoints the exact birth of impressionism

Revealed (to the minute)

The precise time when impressionism was born
From slow-roasted to sugar-cured: how to make the most of the British tomato season

Make the most of British tomatoes

The British crop is at its tastiest and most abundant. Sudi Pigott shares her favourite recipes