Self-employment in Britain grew rapidly in the wake of the 2008 financial crisis. Permanent jobs became harder to hold onto as the UK economy reorganised itself to meet new realities, and stricter rules on claiming unemployment benefits also forced many to look at self-employment as an option – students in particular have seen a consistent rise in creation of their own businesses, as the importance of getting your foot in the door early only seems to increase, year on year. Of the available labour force 15% are now classed as self-employed, compared to 12% in 2001, when they numbered just 3.3m people. Of all self-employed individuals 41% are freelancers, selling their labour on the open market to a number of different clients.
The difficulties of freelancing
Although many report a more satisfying work-life balance and the ability to earn a greater income, freelancing life is not without its difficulties. There isn’t the job security of being a permanent employee, and it’s harder to plan ahead financially without the knowledge of a steady fixed wage coming in every month. In addition, freelancers don’t get paid holidays or sick pay, and are not entitled to legal protections such as minimum wage.
As well as having to negotiate their own fees, freelancers have to arrange their own pensions and make their own tax arrangements. Effectively, that is an extra job. For example, a freelance plumber has to do all the admin work and complete tax returns on top of their regular work. That is why many freelancers pay an accountant to do the work that a paid employee had previously done in their employer’s payroll department.
A major headache facing freelancers is the looming rollout of IR35 rules to the private sector that is scheduled for April 2020. This means that it will be up to the company hiring a freelancer to determine whether they should be classed as an employee or as a contractor for tax purposes.
Freelancers often set up as a limited company for tax purposes, making them liable for corporation tax rather than income tax and national insurance payments, thus saving them money. Sometimes this may be as much as 25% of their take-home pay.
IR35 was introduced in 2000 to tackle perceived tax avoidance by employees claiming to be contractors despite working regularly for just one employer. It was up to freelancers to declare if they were contractors or employees, but public sector companies that hired freelancers were made liable for assessing their status in 2017, and had to face the consequences in terms of unpaid tax and N.I. if they were found to have classified them wrongly.
Next year private sector companies will be made liable in the same way, and it’s feared that many will simply class all their contractors as employees in order to avoid being caught out, a decision that could be catastrophic for the UK’s millions of genuine freelancers. For these contractors, one option is an umbrella company, which will make sure they are IR35-compliant and will also handle all tax and payroll-related admin on their behalf. The majority of genuine freelancers working in the public sector since 2017 have taken this route in order to remain inside IR35 rules.
Expert bodies including the Institute of Chartered Accountants have insisted that companies are unprepared for the change and should be given clearer guidelines and more time. If a company decides to class all freelancers as employees and put them all on the payroll, the freelancer may not realise this has happened until they’ve been paid, and find that they’ve received considerably less than expected.
Surveys suggest that 59% of companies were considering a blanket classification of all their contractors as employees because they lack the time and resources to make individual assessments. They may also hire fewer outside contractors in order to avoid the issue altogether.
Ways to proceed
Freelancers with unique, sought-after skill sets will be in a better position to negotiate than regular tradespeople. And while freelancers may be classed as employees for tax purposes, that doesn’t necessarily mean they’ll get other employee benefits like holiday pay, sick pay, access to a pension scheme or protection from unfair dismissal. Experts recommend using umbrella companies to get the best deal while staying clearly within IR35 rules, and to avoid making one-off arrangements that may not stand up to legal scrutiny.
In 2016, freelancers contributed £119bn to the UK economy, and for many it is a satisfying and fulfilling way of working. Contractors, clients and government need to work together to avoid the pitfalls and get the best deal possible in order to sustain all the benefits of the freelance economy.