What is the real reason behind the UK’s falling unemployment figures?

Is the UK’s steadily falling unemployment rate being driven primarily by a rise in self-employment, rather than a recovery of permanent jobs?

Depending on who you speak to, employment figures are either great news or a disaster.

With imminent election, the Government is happily repeating the falling unemployment figures to anyone who will listen, but bodies such as the Trade Union Congress have issued alarming reports that Britain’s now-4.7 million-strong self-employed workforce lack job security and employee rights, earn well below the average wage, and have started their own business due to a lack of better options.

Often with political issues such as this, the real answer lies somewhere in the middle. However in this case it looks as though both parties could be telling the truth, but talking about different things.

The numbers problem

Self-employment numbers as reported by the Office for National Statistics aren’t concrete figures – they’re the result of sample surveys.

So the ONS numbers aren’t recording the exact number of sole traders, umbrella contractors, limited company directors or any single specific legal entity – they’re recording the number of people that identify as self-employed.

UK self-employed

We know from available research that sole traders are more likely to identify as self-employed, while limited company directors are more likely to see themselves as “business owners” or “company directors” – even if they’re running a company of one. So it’s relatively safe to assume those classed as “self-employed” by the ONS are sole traders.

But what about the limited company freelancers and contractors? It would appear they’ve been largely excluded from the debate up until now.

Attempting to compare sole traders and one person limited companies is where we encounter the biggest problem in the self-employment debate. The data we need to get the whole picture is split between the ONS Labour Force Statistics, HMRC’s Self Assessment receipts and Companies House data.

What are people actually earning in the UK?

According to HMRC’s Personal Income Statistics, the average income for a self-employed person in the UK is around £13,500 per year – which would seem to back up the TUC’s “low paid jobs” line. However this group’s average earnings is weighed down by a huge number of people who earn very little (a few thousand pounds per year) through their self-employment. This group – over a million of them – are the moonlighting freelancers, doing work here and there to supplement their income.

As to what the average full-time sole trader earns, it’s very difficult to tell. Tax Research estimates around £19,000.

But again, what of the limited company brigade? We know that 43.5% of limited companies in the UK are freelancers and contractors. Based on that ratio about 230,260 one-person limited companies were formed in 2013/14 (about 35,000 more than the previous year). In the same period roughly 326,000 people became sole traders.

We know that one-person limited companies earn on average £58,200 per year. Compare that to the Tax Research figure of £19,000 for sole traders and it seems we’re looking at a two-speed self-employment boom.

High earners quitting day jobs

On one hand, high earners are quitting their jobs, incorporating, and earning more than twice the national average wage. These are the entrepreneurial go-getters that Osborne and Cameron love to lionise.

On the other hand, those taking their first steps into self-employment are sole trading, earning a somewhat lesser wage (below the national average in many cases) and missing out on employee rights and job security. This is the group the TUC and others are concerned about.

To attribute the entire self-employment boom to either group is patently inaccurate – however this kind of nuance tends to get lost in political debate.

Do sole traders earn less than limited company directors?

Based on the available data we can conclude that sole traders earn significantly less than Limited Company Directors – and the former group is growing faster. This trend could change over time though, as those who have been freelancing longer tend to earn significantly more.

The TUC’s claim that the UK’s burgeoning ranks of self-employed workers are going it alone out of necessity doesn’t appear to wash, though.

A survey by RSA found only 15% chose self-employment due to a lack of better options (over 50% chose it “to have more freedom”), Global Entrepreneurship Monitor found the number freelancing out of choice was five times higher than those forced into it, and the Resolution Foundation reported that almost three quarters (72%) of newly self-employed professionals prefer it to salaried work.

It may be a while yet before the UK’s exploding self-employed population is fully understood – not least due to the problems understanding how they work and what they earn. It seems clear from the available data that the vast majority enjoy their job but, just like full-time employees, will have to wait for their wages to recover to pre-recession levels.

How to maximise your earnings

Of course, everyone’s work situation is different and advice will differ from client to client – we are here to help provide guidance whatever your circumstance may be.

Contact Omni Chartered Accountants today for information about how you could benefit by incorporating your current as a limited company or not, as your case may actually be.

Self assessment tax return help

The self-assessment tax return is an unavoidable burden if you are liable for self-employed tax or have more complicated income tax affairs. Both self-employed business owners and company directors must complete self-assessment tax returns.

The right approach to your self-assessment tax return will minimise aggravation and can reduce the amount of income tax that you end up paying.

Our guidance will help you understand the key issues that need to be dealt with. For help with the specifics, talk to an accountant: professional expertise should save you time and money.

Registering for self-assessment

Who needs to complete a self-assessment tax return?

·         Recently self-employed

·         Have become a partner in a partnership

·         Are a company director

·         Have untaxed income (perhaps from rental property or complicated income tax affairs)

·         Have an income of £100,000 or more

·         Need to pay capital gains tax or have expenses to claim

There are a number of circumstances under which you may be required to complete a self-assessment tax return.

You can find out if you need to complete a self-assessment tax return on the HM Revenue & Customs (HMRC) website, or by giving Omni a quick call on 01902 837408.

Before you can complete your first self-assessment income tax return, you will need to register with an accountant or with HMRC. You should register as soon as your circumstances change but certainly no later than 5 October after the end of the tax year for which you need to submit a form.

Do your travel to work expenses stand up to scrutiny?

Although there are differences between tax rules for self-employed and employed people, many of us are able to identify our travel to & from our normal place of work – the commute, as we call it, is not deductible for tax purposes.

However, until recently, HM Revenue & Customs has taken a very narrow and literal view of what is allowable work travel, and what amounts to “commuting” to or from home. The findings of two recent cases, however, could pose problems for you if you have both employment and self-employment.

     1.Commute allowable expenses tribunal case study

In the first case, a doctor worked partly for the NHS, and partly as a self-employed consultant, and travelled by car between his home, the NHS hospital and his private consulting rooms.

After an exhaustive and detailed analysis of his travel patterns, the tribunal eventually diagnosed that all of his travel to and from the NHS hospital, from his home to his consulting rooms, and between the hospital and his consulting rooms was not allowable for tax.

As such, his travel expenses were described as not having been incurred in the furtherance of his business, but rather arose from where he lived.

2. Case study for allowable work travel expenses

In the second case, a self-employed flying instructor claimed to be operating from his home and that his travel to the two airfields where he gave lessons amounted to business travel in the course of his trade.

The Tribunal decided that both airfields were his regular places of work and that no deduction was due for his travel to or from them.

Would your work travel arrangements stand up to inspection?

Both cases point to the fact that a person’s business or employment base is not always where they think it is. They demonstrate that HMRC and the Tribunals are making a greater distinction than in the past between travelling in the course of a business, and travelling to a place where their work is regularly carried out.