PAYE to Self Employed
Discussion
Spurred on the from the 'Do you hate your job?' thread currently running in this section (Yes, I hate the current situation but not the job itself) I'm exploring the possibility of ditching the PAYE comfort zone and entering the world of self employment. Apart from employing the services of a few self employed staff I am a relative layperson in terms of working for ones self.
I am interested to hear from anyone who has left the relative comfort of a PAYE position and taken on the world of self employment, is thinking about it, has always worked on a self employed consultancy basis or has even done the reverse and traded the accountant for a monthly payslip.
Some background without being too specific:
I work for a large multi national in the design of ELV systems for large clients and M&E contractors in a design manager role. I currently manage a team of admin, design and CAD staff with mixed PAYE and self employed statuses. For last few years I've worked solely on client specific projects and have been involved from project start, hiring and recruitment, design concept, implementation and installation support through to project finish, provision of handover documentation etc. The teams have ranged from 5 to 25 individuals. I have previously worked solely as a designer prior to this.
I am relatively young at 31, have a hefty mortgage at near £1k per month, married but other than two dogs, no dependents.
Lately I've come to find managing people really quite boring and miss the days where I could get stuck in to a design project and lose myself for hours and hours. The days have become long, the work tedious and the Sunday night dread not only returning but starting to take over entire weekends. I start to think about returning to work on Monday at 17:30 on a Friday afternoon. We are currently approaching the end of a 2 year project and as such the design work is dwindling and the highlight of my recent weeks has been signing off timesheets and expenses. The start of the next major project is potentially 6-12 months away (and tender award dependent) and we are filling the time with small, micro projects which are little more than admin exercises.
The added insult and part of the push towards self employment is that the company is traditionally quite poor in providing yearly pay increases which were minimal at best and always below inflation. Last year they were taken over by an American company and as a result there has been no annual pay increase this year despite promises of an agreed increase and back payment to April. Given that it's now closer to the start of the next financial year, I cannot see a pay increase being agreed with back payment for potentially thousands of staff.
Combine this with the fact that some of the contractors we employ are billing upwards of £120k PA (Some have been contracted on a day rate for approaching two years now) while I have to manage these guys and I'm just about breaking into the 40% tax bracket. I appreciate the agencies will be taking anywhere from 10 - 20% of the rates and there will be associated costs that the contractors incur as a part of being self employed but I would estimate that they are easily earning £75k if not more for relatively easy work. I could certainly do this work standing on my head.
That leads me to the main point of the thread, how difficult would it be enter the world of self employment?
The idea would be to offer design and survey services based around the specialist ELV systems that I am experienced and qualified in. Sit outside of IR35 working for multiple clients at any one time rather than be a long term agency worker. Perhaps even offer design stage project management or cover design team management roles.
The bulk of contractors in this niche seem to be older journeymen nearing retirement who have quit being long term PAYE to top up their savings before sailing off into the sunset. Its very rare to find younger contractors with the average age of the contractors in our employ being early 60's. I'm hoping that being relatively young, being well au fait with IT (some of the contractors we've had have struggled with even basic word documents, pricing documents, design calculators etc) and flexible will work in my favor.
There seems to be healthy market for this based on the contractors we currently employ running multiple contracts simultaneously and I have been approached by various recruitment bods over last few months.
I have many questions and no doubt the responses to those would generate even further questions.
- How would one even approach self employment? Would I need to register as a business, sole trader with a UTR and work via agencies or another method?
- What do business costs look like? What can I expect to pay in accountancy fees, business bank account fees, insurance fees (either all an encompassing policy or individual policies for public liability, professional indemnity etc).
- How much in the way of costs would one incur in the setup of a self employed? Beyond buying some basic IT (already have a decent home office setup albeit using company hardware), finding a replacement for the company car and the initial outlay on insurance and setting up with an accountant I can't think of much else at this very moment.
- What can I expect in terms of off contract periods? It very probably depends on the industry and person but does anyone regularly experience weeks or months between contracts? Does the increased rate generally cover these periods providing that one saves a portion of income and sets it aside for this purpose.
- How much of an arse is IR35? I currently employ upwards of 15 contractors via agencies with those mixed between ltd companies and working via umbrella companies. Some fall outside and some fall inside of IR35 based on the KPMG assessment tool we use. There doesn't seem to be much in the way of consistency in this leaving some contractors working via a rate sapping umbrella company while others are working outside of IR35.
- How would one fare taking on contract work on evenings and weekends to test the water? IMO it would skirt dangerously close to a conflict of interest and possibly result in dismissal despite my current employment being based around a specific client and contract work would be outside of this.
I'll leave at that for now and look forward to hearing from anyone who has something to say on this topic. This is already a lot longer than I first imagined and well done if you managed to navigate my poor grammar and limited vocabulary.
Having a mortgage to pay may even mean self employment is a non starter and I may not even have the stones to go it alone.
I am interested to hear from anyone who has left the relative comfort of a PAYE position and taken on the world of self employment, is thinking about it, has always worked on a self employed consultancy basis or has even done the reverse and traded the accountant for a monthly payslip.
Some background without being too specific:
I work for a large multi national in the design of ELV systems for large clients and M&E contractors in a design manager role. I currently manage a team of admin, design and CAD staff with mixed PAYE and self employed statuses. For last few years I've worked solely on client specific projects and have been involved from project start, hiring and recruitment, design concept, implementation and installation support through to project finish, provision of handover documentation etc. The teams have ranged from 5 to 25 individuals. I have previously worked solely as a designer prior to this.
I am relatively young at 31, have a hefty mortgage at near £1k per month, married but other than two dogs, no dependents.
Lately I've come to find managing people really quite boring and miss the days where I could get stuck in to a design project and lose myself for hours and hours. The days have become long, the work tedious and the Sunday night dread not only returning but starting to take over entire weekends. I start to think about returning to work on Monday at 17:30 on a Friday afternoon. We are currently approaching the end of a 2 year project and as such the design work is dwindling and the highlight of my recent weeks has been signing off timesheets and expenses. The start of the next major project is potentially 6-12 months away (and tender award dependent) and we are filling the time with small, micro projects which are little more than admin exercises.
The added insult and part of the push towards self employment is that the company is traditionally quite poor in providing yearly pay increases which were minimal at best and always below inflation. Last year they were taken over by an American company and as a result there has been no annual pay increase this year despite promises of an agreed increase and back payment to April. Given that it's now closer to the start of the next financial year, I cannot see a pay increase being agreed with back payment for potentially thousands of staff.
Combine this with the fact that some of the contractors we employ are billing upwards of £120k PA (Some have been contracted on a day rate for approaching two years now) while I have to manage these guys and I'm just about breaking into the 40% tax bracket. I appreciate the agencies will be taking anywhere from 10 - 20% of the rates and there will be associated costs that the contractors incur as a part of being self employed but I would estimate that they are easily earning £75k if not more for relatively easy work. I could certainly do this work standing on my head.
That leads me to the main point of the thread, how difficult would it be enter the world of self employment?
The idea would be to offer design and survey services based around the specialist ELV systems that I am experienced and qualified in. Sit outside of IR35 working for multiple clients at any one time rather than be a long term agency worker. Perhaps even offer design stage project management or cover design team management roles.
The bulk of contractors in this niche seem to be older journeymen nearing retirement who have quit being long term PAYE to top up their savings before sailing off into the sunset. Its very rare to find younger contractors with the average age of the contractors in our employ being early 60's. I'm hoping that being relatively young, being well au fait with IT (some of the contractors we've had have struggled with even basic word documents, pricing documents, design calculators etc) and flexible will work in my favor.
There seems to be healthy market for this based on the contractors we currently employ running multiple contracts simultaneously and I have been approached by various recruitment bods over last few months.
I have many questions and no doubt the responses to those would generate even further questions.
- How would one even approach self employment? Would I need to register as a business, sole trader with a UTR and work via agencies or another method?
- What do business costs look like? What can I expect to pay in accountancy fees, business bank account fees, insurance fees (either all an encompassing policy or individual policies for public liability, professional indemnity etc).
- How much in the way of costs would one incur in the setup of a self employed? Beyond buying some basic IT (already have a decent home office setup albeit using company hardware), finding a replacement for the company car and the initial outlay on insurance and setting up with an accountant I can't think of much else at this very moment.
- What can I expect in terms of off contract periods? It very probably depends on the industry and person but does anyone regularly experience weeks or months between contracts? Does the increased rate generally cover these periods providing that one saves a portion of income and sets it aside for this purpose.
- How much of an arse is IR35? I currently employ upwards of 15 contractors via agencies with those mixed between ltd companies and working via umbrella companies. Some fall outside and some fall inside of IR35 based on the KPMG assessment tool we use. There doesn't seem to be much in the way of consistency in this leaving some contractors working via a rate sapping umbrella company while others are working outside of IR35.
- How would one fare taking on contract work on evenings and weekends to test the water? IMO it would skirt dangerously close to a conflict of interest and possibly result in dismissal despite my current employment being based around a specific client and contract work would be outside of this.
I'll leave at that for now and look forward to hearing from anyone who has something to say on this topic. This is already a lot longer than I first imagined and well done if you managed to navigate my poor grammar and limited vocabulary.
Having a mortgage to pay may even mean self employment is a non starter and I may not even have the stones to go it alone.
The grass is not always greener (a lot of the issues you’ve mentioned are a good reason why contractors get what appears to be a high daily rate, but at the end of it may not be that far up vs PAYE)
However, if things go well then the reduction in job security and added hassle may be worth it. Mortgages etc are no issue.
I don’t know your industry so won’t comment on that. I will say that you need financial discipline; don’t spend the tax and VAT money, and remember that your first tax return will require you to pay not only last year’s tax but also next year’s, so be prepared!
However, if things go well then the reduction in job security and added hassle may be worth it. Mortgages etc are no issue.
I don’t know your industry so won’t comment on that. I will say that you need financial discipline; don’t spend the tax and VAT money, and remember that your first tax return will require you to pay not only last year’s tax but also next year’s, so be prepared!
IR 35 applies to employing staff from Ltd companies, not to self-employed individuals.
If the employing company is willing to accept self-employed status that makes it easier. You will need to inform HMRC when you go self-employed, and, has already been noted, be prepared to pay income tax up front for the following year. Dependent on rate charged you may need to register for VAT at some point, not usually an issue with invoicing a company rather than an individual, IIRC the turnover to register is now £90k.
Be prepared to wait for your money, generally invoicing is not treated the same as payroll.
If the employing company is willing to accept self-employed status that makes it easier. You will need to inform HMRC when you go self-employed, and, has already been noted, be prepared to pay income tax up front for the following year. Dependent on rate charged you may need to register for VAT at some point, not usually an issue with invoicing a company rather than an individual, IIRC the turnover to register is now £90k.
Be prepared to wait for your money, generally invoicing is not treated the same as payroll.
dci said:
Combine this with the fact that some of the contractors we employ are billing upwards of £120k PA (Some have been contracted on a day rate for approaching two years now) while I have to manage these guys and I'm just about breaking into the 40% tax bracket. I appreciate the agencies will be taking anywhere from 10 - 20% of the rates and there will be associated costs that the contractors incur as a part of being self employed but I would estimate that they are easily earning £75k if not more for relatively easy work.
Whilst a contractor is likely to be earning more you need to consider what the trade-offs are.A contractor is carrying greater financial burden and – crucially – greater financial risk. You’ve mentioned the costs they incur but you also have to take into account the periods when they’re not working or waiting for a contract to start. And if a PAYE employee makes an error, they may get a b
king. If a contractor makes the same error, they may not get paid. They may even get booted off the contract. The risk and reward is therefore very different. It therefore comes down to your propensity for risk and your capacity to manage that risk. All that said and all things being equal, almost always, self-employment will be what leads to greater financial freedoms.
And setting up a Ltd company gives you a vehicle from which to develop something else, should the opportunity arise. It gives you options.
I set up a ltd company in 2019 with the intention of operating as a consultant. Within six months, it was operating as a business (Comms Agency). I didn’t and haven’t employed anyone but win projects on which I work along with collaborators I select for the task. Sometimes I just win the work and get others to deliver it.
31 is a good age to do this. You’re old to enough to have built reputation and experience so getting work should be easy. But you’re young enough to recover if all goes wrong.
The one advice I would give is not to fall into the trap of thinking you’re owning your own business when going self-employed contractor. You don’t. You own your own job. There is a very big difference!
HTH and good luck.
Setting up a company can be done same day (if you take an off the shelf name that is available), usually a few days otherwise, used to be a couple of hundred quid, but it's been a while.
What about VAT, i.e. will you be charging it, if your business is earning over £60K PA you can apply for VAT registration, may have changed, again been a while.
You can claim all of this back through your business once it's up and running.
You'll need a business bank account, I guess a laptop and phone, again if you have these the business can buy them off you at a reasonable cost.
You'll probably need some indemnity insurance once you get a contract, that's probably £300+ per year an accountant, probably £1K per year for returns, accounts etc.
However, if you go inside IR35 you don't need anything of the above, you'll be PAYE as you are now just earning more and getting hammered in tax.
If outside you'll need the above, you can claim stuff like travel via the business, food/drink while working, all offest against corporation tax which you will need to pay.
If you have a home office there's cleaning allowance, if you work away from home you can claim all of that and a £5 per night incidental allowance amongst other things.
I think the thing to do is speak to agencies and see what the market is like, if you can jump ship and co contracting if it's inside it's pretty seamless, outside you can do the above in the background whilst onboarding.
What about VAT, i.e. will you be charging it, if your business is earning over £60K PA you can apply for VAT registration, may have changed, again been a while.
You can claim all of this back through your business once it's up and running.
You'll need a business bank account, I guess a laptop and phone, again if you have these the business can buy them off you at a reasonable cost.
You'll probably need some indemnity insurance once you get a contract, that's probably £300+ per year an accountant, probably £1K per year for returns, accounts etc.
However, if you go inside IR35 you don't need anything of the above, you'll be PAYE as you are now just earning more and getting hammered in tax.
If outside you'll need the above, you can claim stuff like travel via the business, food/drink while working, all offest against corporation tax which you will need to pay.
If you have a home office there's cleaning allowance, if you work away from home you can claim all of that and a £5 per night incidental allowance amongst other things.
I think the thing to do is speak to agencies and see what the market is like, if you can jump ship and co contracting if it's inside it's pretty seamless, outside you can do the above in the background whilst onboarding.
essayer said:
The grass is not always greener (a lot of the issues you’ve mentioned are a good reason why contractors get what appears to be a high daily rate, but at the end of it may not be that far up vs PAYE)
However, if things go well then the reduction in job security and added hassle may be worth it. Mortgages etc are no issue.
I don’t know your industry so won’t comment on that. I will say that you need financial discipline; don’t spend the tax and VAT money, and remember that your first tax return will require you to pay not only last year’s tax but also next year’s, so be prepared!
Now that's very good to know. Thank you. Thanks also to everyone else who replied. I wanted to get back in front of a keyboard before replying rather than having to use a touch screen. However, if things go well then the reduction in job security and added hassle may be worth it. Mortgages etc are no issue.
I don’t know your industry so won’t comment on that. I will say that you need financial discipline; don’t spend the tax and VAT money, and remember that your first tax return will require you to pay not only last year’s tax but also next year’s, so be prepared!
Having spent my working life on PAYE, I'm not quite sure how tax works for self employed individuals.
Say for example, self employed via a Ltd company you were able to bill the equivalent of £100k which is around £400 per day based on a 48 week year (which is not too far away from what some of my team have billed) what would the tax breakdown look like?
I (naively) assume that you wouldn't pay this directly to yourself as a wage and pay the upper rates of tax but would pay out the bare minimum as a wage to meet the minimum national insurance, use the tax free allowance and pay the rest in dividends or some other method?
Would expenses like insurances, vehicles IT etc be deducted from the total billed prior to assessing tax owed?
GreatGranny said:
Have you thought about changing companies but still being PAYE?
They may appreciate your knowledge and experience more and pay you accordingly.
That's also an option I am exploring with the aim of this being to push myself out of the comfort zone a little. I've become a little too comfortable in my current position and I've traditionally erred on the side of caution. Though the lure of changing work environments, new people, new sites etc is quite appealing.They may appreciate your knowledge and experience more and pay you accordingly.
I don't think anyone has yet mentioned the use of an Accountant? OK, its not mandatory, you could of course do all the books yourself, but having been Ltd Company for the last 11 years, I'd personally suggest you employ the services of an accountant who will look after all of that side of things for you, such that you can concentrate on 'flying the plane'. Most will now include the provision of something like 'FreeAgent' software, to allow you to keep an eye on and manage all of your receipting, invoicing, tax liabilities on the fly, via an App on your phone or a portal you can log into.
It doesn't need to be a local firm, as you'll generally never need to visit/physically engage with them. I use a firm called Gorilla Accountants, based up in Bolton (I am in Berkshire), who are generally pretty good and keep things neat and tidy for me and i've got a dedicated point of contact. The cost is £120+VAT a month, which includes processing your VAT returns, Corporation Tax liabilities, NI bits and bobs, submitting confirmation statements and of course, all of your Self Assessment matters including payslips and dividend vouchers etc. This cost also includes them providing you with a 'business address', which means they manage all business (tax) related post and means your personal address isn't listed on Companies House.
I have a catch up with them once a quarter-ish, where they do a quick review of the state of play regarding my books/earnings/outgoing etc and make any recommendations on efficiencies etc. For me, this is a must.
It doesn't need to be a local firm, as you'll generally never need to visit/physically engage with them. I use a firm called Gorilla Accountants, based up in Bolton (I am in Berkshire), who are generally pretty good and keep things neat and tidy for me and i've got a dedicated point of contact. The cost is £120+VAT a month, which includes processing your VAT returns, Corporation Tax liabilities, NI bits and bobs, submitting confirmation statements and of course, all of your Self Assessment matters including payslips and dividend vouchers etc. This cost also includes them providing you with a 'business address', which means they manage all business (tax) related post and means your personal address isn't listed on Companies House.
I have a catch up with them once a quarter-ish, where they do a quick review of the state of play regarding my books/earnings/outgoing etc and make any recommendations on efficiencies etc. For me, this is a must.
Edited by MattyD803 on Thursday 3rd October 17:22
dci said:
Now that's very good to know. Thank you. Thanks also to everyone else who replied. I wanted to get back in front of a keyboard before replying rather than having to use a touch screen.
Having spent my working life on PAYE, I'm not quite sure how tax works for self employed individuals.
Say for example, self employed via a Ltd company you were able to bill the equivalent of £100k which is around £400 per day based on a 48 week year (which is not too far away from what some of my team have billed) what would the tax breakdown look like?
I (naively) assume that you wouldn't pay this directly to yourself as a wage and pay the upper rates of tax but would pay out the bare minimum as a wage to meet the minimum national insurance, use the tax free allowance and pay the rest in dividends or some other method?
Would expenses like insurances, vehicles IT etc be deducted from the total billed prior to assessing tax owed?
Running a limited company requires regular spend on overheads such as annual fees. A company also pays Corporation Tax on its profits, before you take any dividends.Having spent my working life on PAYE, I'm not quite sure how tax works for self employed individuals.
Say for example, self employed via a Ltd company you were able to bill the equivalent of £100k which is around £400 per day based on a 48 week year (which is not too far away from what some of my team have billed) what would the tax breakdown look like?
I (naively) assume that you wouldn't pay this directly to yourself as a wage and pay the upper rates of tax but would pay out the bare minimum as a wage to meet the minimum national insurance, use the tax free allowance and pay the rest in dividends or some other method?
Would expenses like insurances, vehicles IT etc be deducted from the total billed prior to assessing tax owed?
As others have said, engage an accountant for advice and assistance.
Another point, if self-employed in whatever form you will need to take out insurance to cover various potential liabilities. If operating as a limited company and you have a payroll you require Employer's Liability Insurance, also Professional Indemnity and potentially 3rd party liability, contractor's insurance etc.
dci said:
Now that's very good to know. Thank you. Thanks also to everyone else who replied. I wanted to get back in front of a keyboard before replying rather than having to use a touch screen.
Having spent my working life on PAYE, I'm not quite sure how tax works for self employed individuals.
Say for example, self employed via a Ltd company you were able to bill the equivalent of £100k which is around £400 per day based on a 48 week year (which is not too far away from what some of my team have billed) what would the tax breakdown look like?
I (naively) assume that you wouldn't pay this directly to yourself as a wage and pay the upper rates of tax but would pay out the bare minimum as a wage to meet the minimum national insurance, use the tax free allowance and pay the rest in dividends or some other method?
Would expenses like insurances, vehicles IT etc be deducted from the total billed prior to assessing tax owed?
For your business you have your inputs - 100K and your outputs - salary, dividends, expenses, purchases, insurances etc, whatever is left is subject to corporation tax.Having spent my working life on PAYE, I'm not quite sure how tax works for self employed individuals.
Say for example, self employed via a Ltd company you were able to bill the equivalent of £100k which is around £400 per day based on a 48 week year (which is not too far away from what some of my team have billed) what would the tax breakdown look like?
I (naively) assume that you wouldn't pay this directly to yourself as a wage and pay the upper rates of tax but would pay out the bare minimum as a wage to meet the minimum national insurance, use the tax free allowance and pay the rest in dividends or some other method?
Would expenses like insurances, vehicles IT etc be deducted from the total billed prior to assessing tax owed?
Then your salary/dividends are subject to tax, assuming you take a minimum wage/salary this will reduce your NI payments.
Gassing Station | Jobs & Employment Matters | Top of Page | What's New | My Stuff