Costs of going it alone
BEING SELF-EMPLOYED
BEING your own boss has its benefits but there are also costs, as the self-employed sacrifice workplace benefits worth £6,000 a year, and in many cases more.
Striking out alone means no holiday pay, employer pension contributions, maternity pay or death-in-service payments.
The self-employed have to jump through more hoops to get a mortgage, and have found it harder to claim government support in the pandemic.
Many undervalue the importance of workplace benefits, which really add up, according to new analysis by insurer Royal London.
For someone on a £30,000 salary, holiday pay is worth £2,885 a year, while a 5 per cent employer pension contribution totals £1,500 and two weeks of sick pay add up to £1,154.
Death-in-service benefits equivalent to four times salary, would cost £360 a year if a self-employed person paid the premiums themselves.
These benefits total £5,899, while one-off payments such as maternity leave would be worth £11,250, and bereavement leave £1,154.
Royal London consumer spokesperson Mona Patel said anyone thinking of becoming self-employed should plan
before taking the leap. “You will have to shoulder the cost of things that many employees take for granted.”
Separate research from Interactive Investor, shows the self-employed miss out on £4billion worth of employer pension contributions a year and most do not make this up from their own resources.
Interactive Investor head of pensions and savings, Rebecca O’connor, said pensions are often the last consideration when going it alone and four out of five have not done it.
“The potential losses over a working lifetime are staggering,” she said.
She urged self-employed workers to plug the gap by setting up a pension and claiming tax relief on the contributions.
Being self-employed could even prevent you from buying the house of your dreams, with one in six declined for a mortgage because they run their own business, according to broker Haysto.
Co-founder Paul Coss said lenders favour applicants in full-time employment because their income is easier to understand. “The self-employed should not be penalised for that.”
Applicants must prove they have a reliable, regular, stable income and supply two or more years of certified accounts, ideally prepared by a qualified chartered accountant.
Contract workers may also have to show evidence of upcoming contracts, while company directors may need to provide evidence of dividend payments or retained profits.
Coss said having a deposit of at least 10 per cent and a good credit rating will aid your cause.
Covid-19 has made life harder for the nation’s army of self-employed, which stood at just over five million at the start of the pandemic.
Of these, 1.7 million were not eligible for government grants, while one in five who were eligible have failed to claim.
Perhaps unsurprisingly, the number of self-employed has since fallen by 650,000, a drop of 13 per cent.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said some saw their income drop like a stone. “However, others have never been busier.”
While many love the freedom that being self-employed brings, they have to push themselves harder to make it work.