It is a tough decision to make when you are deciding whether to seek employment or to ‘go it alone’ as a freelancer.  There are obvious benefits to freelancing which are often key to this decision making process.  Being able to choose where and when you work is the main factor for many, especially when there are family considerations to take into account. Saying no to certain a certain type of work is also quite liberating (at the start you will no doubt be saying yes to nearly everything – it can be quite scary not knowing where the next bit of work is coming from).

It should not be forgotten that the way you are taxed can also be beneficial and leave you with more disposable income.  More and more freelancers are choosing to trade through a limited company rather than as a sole trader, particularly when they are offering advice as part of their service, as the culture of ‘where there’s blame there’s a claim’ becomes more wide spread.

The tax benefit of doing this has decreased over the last couple of years, but you will still be better off once your taxable profit is over a certain level. In addition to the 1% reduced level of corporation tax compared to the basic rate of income tax you would pay as a sole trader (and this gap is likely to increase), structuring your income efficiently between salary and dividends provides an additional saving as dividends are taxed at 7.5%, compared to 9-12% national insurance which is charged on sole trade or employment income.

The additional benefit you have of trading through a limited company is that you can choose when to take the dividends, thereby potentially reducing how much of your income goes into the higher rate tax bracket. Sole trade profits however are taxed in the year they arise, so a good year forces you into losing more in tax even if you have achieved this through a one-off large contract or short term work that will not continue. Through a company, you can limit the level of dividends you take to spread your personal income more evenly.

When comparing freelancing to getting a job, there are a number of expenses you will incur which can be set against your income to reduce the profit which you pay tax on that you cannot claim as an employee. Most people start by working from home so can claim a proportion of their house costs. Replacing your 5 year old computer with one which is more fit for purpose and providing you with a mobile phone are other examples of expenses you would normally pay out for from your income after tax, but which your company can provide to you and claim tax relief on. Any employer can provide you with these things, but they may be reluctant to agree to pay for this, especially if you do not work from home as part of your employment.

I should add at this point that it does not matter what the guy down the pub or the Facebook post says, you can’t claim for holiday’s, most clothing or dry cleaning and you don’t get tax relief on entertaining, so don’t commit to that season ticket at the local football club just yet.

However, you may have the opportunity in your business to employ a spouse or other family member (those university age children for example) to carry out admin or bookkeeping tasks for the business which will also make use of their tax free allowances. You would of course have to actually pay them for doing the work, but making those students earn their money when you would have given it to them otherwise softens the blow!

It may not be one of the most important factors you consider when deciding whether to go back into employment or to seek freelance work, but these factors could support you in making the decision and should be a part of that decision making process. Of course we would say this, but it is always a good idea to speak to a qualified accountant at the start who will be able to go through everything in more detail and consider your personal circumstances to help you make the right first step.