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.

Start your day with The Independent, sign up for daily news emails
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

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
10 best statement lightbulbs

10 best statement lightbulbs

Dare to bare with some out-of-the-ordinary illumination
Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

Briton pumped up for dream meeting with world No 1
Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

Nick Bollettieri's Wimbledon Files

It's time for big John Isner to produce the goods to go with his thumping serve
Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

Dustin Brown

Who is the German player that knocked Nadal out of Wimbeldon 2015?
Ashes 2015: Damien Martyn - 'England are fired up again, just like in 2005...'

Damien Martyn: 'England are fired up again, just like in 2005...'

Australian veteran of that Ashes series, believes the hosts' may become unstoppable if they win the first Test
Tour de France 2015: Twins Simon and Adam Yates have a mountain to climb during Tour of duty

Twins have a mountain to climb during Tour of duty

Yates brothers will target the steepest sections in bid to win a stage in France
John Palmer: 'Goldfinger' of British crime was murdered, say police

Murder of the Brink’s-MAT mastermind

'Goldfinger' of British crime's life ended in a blaze of bullets, say police
Forget little green men - aliens will look like humans, says Cambridge University evolution expert

Forget little green men

Leading evolutionary biologist says aliens will look like humans
The Real Stories of Migrant Britain: An Algerian scientist adjusts to life working in a kebab shop

The Real Stories of Migrant Britain

An Algerian scientist struggles to adjust to her new life working in a Scottish kebab shop
Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

Dying dream of Doctor Death

Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy