When an individual chooses to work for themselves instead of working for a specific employer, they are associated with self-employment. The prime reason for individuals to become self-employed is because it offers them greater autonomy and power in terms of finances, decision-making, task execution, and working hours than a conventional job can provide. In this blog, we will take an in-depth look at what are the types of self-employed in the UK to give you an insight into the right choice for you.
Moreover, the UK presently has a vibrant and fast-growing sector of self-employed individuals of over 4.4 million because they want to work for themselves rather than being employed by a company.
Moving ahead, according to HMRC and Companies House, self-employed individuals can operate in various ways, meaning there are different types of self-employed individuals. Notably, you will choose the type of self-employment based on the nature of your work and the business structure.
Also, to get a detailed analysis of what self-employment is and how it is better than a conventional job, read our following guides respectively:
Everything you must know about what is self-employment.
What are the advantages and disadvantages of being self-employed?
Get in touch with our young, clever, and tech-driven professionals if you want to choose the solution to tax burden or accounting problems in the UK for your income. We will ensure to offer the best services.
What are the types of self-employed in the UK?
The following are the self-employment kinds which will be elaborated to give you sufficient clarity on what are the types of self-employed in the UK and which one will work the best for you:
Sole traders:
A sole trader is the UK’s simplest and most popular form of self-employment. Being a sole trader means an individual runs their business as the sole or only owner. As a result, they are also solely or personally responsible for their debts as well.
A sole tradership is also called a sole proprietorship. Furthermore, it is easy to set up with HMRC, and the profits in sole tradership are taxed as personal income.
Examples of sole traders include small shop owners and retailers, freelancers (like photographers, writers, and designers), and tradespeople (like electricians, plumbers, and decorators).
It is noteworthy that in sole tradership, there is no legal distinction between the individual and the business, meaning the owner is not legally separate or distinct from the business. For greater clarity, all the profits that your business yields or generates will be yours after you have paid the tax on them to HMRC.
However, if the business spirals downwards or miserably fails, you will be personally liable for all the losses incurred. Ultimately, with the sole ownership in sole tradership comes the unlimited liability.
Legal requirements for sole traders:
- Sole traders are obliged to choose a business name. However, there are certain government rules you must follow regarding running and naming your business. To clarify, an individual cannot use the words limited, Ltd, limited liability partnership, LLP, public limited company or plc in their business name.
- Sole traders pay income tax and National Insurance Contributions on their business profits.
- Sole traders must register and report a self-assessment tax return with HMRC (HMRC uses a self-assessment system to collect income tax).
- Sole traders are legally required to maintain accurate records of sales and business expenses
- They must submit a tax return annually to HMRC
- They must ensure compliance with VAT obligations.
Constraints of sole tradership:
- With sole ownership comes unlimited financial liability.
- Sole traders may often find it harder to raise capital in their personal capacity.
- They have fewer tax planning options
- They may encounter obstruction or barriers to finance
- They may face sales limitations in the marketplace.
Limited company:
Some self-employed individuals choose the option of setting up a limited company to start and run their business. A limited company is another significant form to learn what are the types of self-employed. The company is a separate legal entity, and the individual acts as its director and shareholder.
A limited company is a distinct business entity or vehicle that exists separately from its owners and has legal and financial status. This signifies that it is legally separate from the people who run it, and its finances are also separate from the personal assets of its members.
In addition, a limited company offers the owners limited liability protection for their personal assets. For instance, if the company suffers financial hardships, the owners’ liability will remain limited to the amount they invested in the business.
Likewise, limited liability protection indicates that a business, and not its owners, enters into contracts, employs staff, stands liable for debts and profits, and shall be subject to prosecution if it commits any criminal offence.
Moreover, although limited companies are less common than sole traderships, millions of UK businesses fall into this legal structure category.
Notably, a limited company is either limited by shares or guarantees. A limited company by guarantee is mostly run by guarantors.
On the other hand, for a limited company by shares, the owners, who are also called its members or shareholders, can either govern it themselves by being elected to the board of directors or appoint the directors to have direct involvement in the operational or managerial tasks of the company.
Finally, the most common examples of a limited company can be found in IT consultants, legal and accounting service professionals, and creative agencies.
Legal requirements for a limited company:
- A limited company needs to be registered with Companies House.
- Ownership of a limited company is divided into equal parts called shares.
- An individual’s ownership in the company is directly proportional to their shareholdings (the number and value of the shares they own).
- The profits generated by a limited company are subject to corporation tax.
- The limited company directors typically pay themselves a salary through the PAYE system and can also withdraw dividends (if they are its shareholders as well).
Considering the benefits of limited financial liability and separate legal status, you might want to consider creating a limited company.
Therefore, it is wise to have an all-encompassing knowledge of a limited company, such as its creation, pros and cons, corporation tax filing, shares, shareholders, and directors.
Accordingly, you can significantly benefit from our following thorough guides:
How to set up a limited company?
Limited company advantages and disadvantages.
What is corporation tax and how it works for limited companies?
Limited company shares: Things you must know about.
A comprehensive guide to limited company shareholders.
What is a company director and what are their responsibilities?
Partnerships:
A partnership is another business arrangement or setup in self-employment types wherein two or more individuals agree to share the responsibilities, profits, and liabilities of the business.
Unlike sole tradership, where only one individual can run the business, partnerships are formed when two or more individuals pour in their capital and utilise their skills for owning and managing the business together.
Some common examples of traditional partnerships include law firms, accountants, medical professionals (like dentists and doctors), and family-run businesses.
Legal requirements:
- A partnership agreement plays a pivotal role in a partnership arrangement. Although not all partnerships necessarily have a partnership agreement, it is highly recommended. For greater clarity, a partnership agreement is a voluntary contract that the partners enter to outline their roles, responsibilities, and financial arrangements.
- Furthermore, it includes each individual’s capital contribution to the business and how profits and losses will be shared.
- Profits are allocated or distributed among partners on the basis of the partnership agreement.
- Each partner is personally liable for their share of any business damages (except in an LLP).
- Notably, partnerships are not taxed like a limited company. In fact, they are not taxed at all. Instead, the profit, earnings, or income that the partnership has generated is first shared between the partners. Thereafter, partners must pay income tax and National Insurance on the share of taxable profits they are allocated from the partnership.
- More importantly, each partner must have to submit a self-assessment tax return with HMRC, similar to a self-employed individual. Lastly, a partnership can return its income tax via an SA800 form to declare its finances and notify HMRC about how profits have been distributed.
Constraints of a partnership:
- Standard or general partnerships are usually advantageous in terms of shared responsibility, reduced time pressure for all the partners, and an enhanced level of expertise. Nonetheless, reaching a consensus on crucial business matters can sometimes become difficult owing to divergent opinions. Beyond that, one partner may believe that others are not putting in adequate effort or making a disproportionate profit.
- Moving further, just like the sole traders, partners are also subject to unlimited liability, meaning each partner’s liability does not remain limited to just their investment amount. Instead, they will be personally liable for all business’s debts and obligations.
- Similarly, a general partnership does not have a separate legal identity from its partners as offered under a limited company. As an outcome, partners bear joint and direct liability for the business’s losses. For instance, in the event of a business’s failure, creditors can seek the full amount from any individual partner.
- It is worth highlighting that the best way to benefit from the limited liability option while staying in a partnership set-up is to form a Limited Liability Partnership (LLP). As the name suggests, an LLP structure offers the partners limited liability, protecting their personal assets from business debts, yet maintaining the flexibility of a partnership.
If you are interested in learning more about an LLP, read our following guide:
What is a Limited Liability Partnership (LLP)?
Contractors and subcontractors:
Contractors are another significant kind when learning what are the types of self-employed in the UK. Contractors are usually self-employed individuals or businesses that offer services to clients under specific contracts. Generally, the contractors work on a project basis, which allows them flexibility in their work.
Further elaborating, contractors and subcontractors typically work as sole traders or via a limited company and work on specific projects or contracts for clients.
Further, contractors often work in industries like construction, IT, and engineering.
Legal responsibilities:
- Just like the other types of self-employment, it is also mandatory for contractors to register with HMRC to fulfil their tax obligations.
- Contractors pay income tax and National Insurance contributions on their earnings based on their business structure.
- They will have to register and pay VAT if their turnover exceeds the current threshold of £90,000.
- Additionally, contractors must comply with IR35 legislation, which are the off-payroll working rules to ensure a contractor pays broadly the same Income Tax and National Insurance as an employee would. Moreover, IR35 rules evaluate the contractors’ tax status based on the nature of their working arrangements.
For further details on IR35 rules, visit the government website:
Self-employed landlords:
To fully understand what are different types of self-employed in the UK, you must also know about self-employed landlords. The individuals who own and rent out properties without remaining linked or tied to an employer are called the self-employed landlords. More specifically, when landlords earn income from renting out their properties, they are considered self-employed for tax purposes.
Interestingly, they manage their business affairs and make business-related decisions independently. In addition, they are also individually responsible for ensuring compliance with legal obligations, such as
- Registering with HMRC.
- Filing annual Self Assessment tax returns to declare their rental income to HMRC.
- Paying income tax and National Insurance contributions on their rental income.
- Maintaining accurate records of their earnings and expenses.
- Complying with relevant housing regulations, including ensuring the safety and maintenance of their rental properties.
Conclusion:
Understanding what are the types of self-employed in the UK can be a life-altering experience for you since you must select the right type based on your business acumen and prowess.
Nonetheless, making the right choice can sometimes be mind-boggling and overwhelming, particularly when you bid farewell to your regular job for the first time. It is when a professional accountant can be your rescuer.
A skilled accountant will not only familiarise you with your tax and reporting obligations towards HMRC but can also manage your finances adeptly on your behalf.
Moreover, what could be better than an economical and nearby accountant listed on the directory list of Accountingfirms who will give you a tailored consultation regarding which option would be the most viable for you, its accompanying benefits and the risks involved?
As a result, you will be better equipped with the knowledge of which self-employment option befits your technical skills, expertise, and passion. Thus, without delaying any further, contact us today and get an instant quote.
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.