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The types of self-employment in the UK

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The types of self-employment in the UK

Being self-employed in the UK is popular, and you may be amazed to know that there are over 5 million self-employed professionals – over 15% of the UK workforce. However, the phrase ‘self-employed’ is pretty vague, as there are a few different types of self-employment in the UK. We’ve summarised the most common types of self-employment in the UK below. 

Sole trader

Being a sole trader is probably the easiest way to operate as a self-employed professional. There isn’t much administration to carry out to get started, and you’ll be responsible for paying your tax and National Insurance Contributions based on your profits for a tax year. 

In legal terms, sole traders don’t have much protection because their business activities are not differentiated from their day-to-day life in the eyes of the law. This means sole traders have unlimited liability; they may have to sell personal belongs to pay business-related debts. 

Being a sole trader is an excellent option for workers who want to try self-employment for the first time. Setting up is easy, and closing down is even easier. Other options may be more suitable for established sole traders or those who start earning more profits – such as setting up a limited company. However, by starting as a sole trader, you’ll get the perfect taste of self-employment, and other opportunities may come your way in the future.

Plenty of sole traders consider themselves freelance – meaning they work for multiple clients and can work on several assignments simultaneously. Other sole traders prefer to operate on a contract-to-contract basis – meaning they’ll operate on one project at a time, for a specific period. There are certainly plenty of opportunities for sole traders!

For more information, check out our guide – Sole Trader Tax: Paying tax as a Sole Trader.

Limited company

Another popular type of self-employment in the UK is operating through a limited company. A limited company means business is separate from the director’s personal finances. This is called limited liability. 

Limited companies are an excellent choice for higher-earning self-employed professionals because there are many opportunities for tax-efficient savings and retaining more money. However, it probably won’t come as a surprise to hear that running a limited company comes with plenty of responsibilities. 

As a one-person business – you’ll be the director, and directors have plenty of administration to take care of – including correspondence with HMRC. Failure to meet your expected duties as a director could land you in trouble. Many limited company directors will appoint an accountant to assist them with their limited company’s financial running. Doing this will ensure everything is completed in time for HMRC deadlines. We can’t blame them!

Limited companies are a popular choice for contractors in the UK. By setting up a one-man business to tackle contracts with end-clients, contractors can take advantage of tax breaks and higher earning potential – providing they’re outside IR35

For more information, check out our guide – Responsibilities of running a limited company.

Partnership

Forming a partnership is another exciting option for self-employed professionals in the UK. Like all arrangements, being in a partnership has its pros and cons. Starting with the cons, you’ll have unlimited liability, which means the partners may have to pay debts with their private funds – if the business was to struggle. Another potential issue will be the fact that you may not always get your way because you’ll have another person to convince – your partner. 

On the plus side, forming a partnership is an exciting way to launch a business. You can team up with a friend or colleague and put your expertise together to form a formidable team. You can put your financial and creative resources together to help give the business a healthy kick start. When you’re in a partnership, you can rely on your partner to help out – meaning you’re not on your own to tackle essential business decisions and take care of administration. Hopefully, you can support each other and eliminate the risk of 10+ hour days.

Partners are advised to spend a lot of time putting a deed of partnership together. This formal document will explain how the business arrangement will work and state who has put what in and how profits will be distributed. Cover everything in the deed of partnership – and both you and your partner can move forward with complete peace of mind.

Summary

We hope the above has helped summarise the most popular types of self-employment in the UK. Our website has been created to answer the most common questions asked by self-employed professionals in the UK. If you’re looking for more information about self-employment, have a browse, and hopefully, you’ll get the answers you’re looking for. New blogs are added every week, so make sure you pop back to our site soon for the latest content. 

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