As the person in charge of finding the best new recruits to join our team, I’m naturally biased when answering this question. I try and give a balanced answer, but in my head I’m repeating “please join us, please join us”. I also know that there is no simple yes or no answer. What is right for one person, might be the worst decision for someone else. Wanting to furnish my answers with a little more than gut feels, I sought insights from our good friends at Plus Accounting for a financial perspective, some freelancing ex-teammates, and ex-freelancers who are now part of the Angry Creative team.
Summary and recommendations
- Be realistic with freelancer billability calculations and factor in having a few quiet periods (low or zero billability for holiday, sickness, sales, admin and training)
- The biggest National Insurance savings are for the employer rather than the self-employed freelancer
- Self-employed freelancers have to be multi-disciplined, or know when to call in professional services, such as bookkeeping or marketing
- Avoiding isolation and creating a bonds with teams or freelancer groups will provide a support network for both employees and self-employed freelancers
Before we get stuck into some of the factors that make this a challenging decision, I should say that we are always looking to meet both freelancers and potential employed teammates. Give me a shout using the contact form here (no agencies please!). So, without further ado…
Day rate
Usually freelancers will charge a daily rate, as opposed to an annual salary. How much will depend on seniority. At Angry Creative, we use industry benchmark research to set our salary bands, so people are paid the same amount here as they are likely to be paid anywhere else doing the same role – fair’s fair. Below is a simplified version we shared with Plus Accounting:
| Role seniority | Salary | Freelance day rate |
| Junior | £25,000 | £150 |
| Intermediate | £30,000 | £200 |
| Senior / Director | £55,000 | £350 |
Billability
One of the mistakes people starting out freelancing make is to simply multiply their expected day rate by 253 (number of working days in 2019). This assumes a client paying for 100% of the freelancer’s work time, and no holiday or sick days. Not impossible, but unlikely. Martin Edwards, a previous employee says: “There’s a lot of unpaid admin time. You’re not going to have paid work all the time. You do have the flexibility to work your ass off and make it easier in the future, if the work’s there!”
Tax and National Insurance
Unless you’re an accountant or a finance manager in an agency, the chances are doing your books is one of the areas you least look forward to. Self-employed people (freelancers) need to submit a self-assessment each year (31st January) and take care of their own tax and National Insurance Contributions (NICs). For employees, the employer takes care of the tax payments and NICs through payroll (PAYE). Using the example salaries and day rates above, we asked Plus Accounting to weigh up the implications for both self-employed and employed workers.
Taxed on profit rather then set amount received
Being self-employed, the amount of tax you are liable to pay is based on profit and not on your earnings. This means that qualifying expenditure incurred whilst carrying out your work duties would be deductible from your sales invoices and will therefore reduce the profit and the tax liability. This differs to employment where tax is deducted on earnings. In the examples below, allowable expenses have not been included in the calculations.
Income Tax for employees and the self-employed
Income tax is calculated for the self-employed in the same way as it is calculated for those who are employed. Assuming you are entitled to the standard tax-free allowance for 2018/19 the following tax rates would apply:
| Taxable income | Tax Rate |
| £0 to £11,850 | 0%- Covered by your personal allowance |
| £11,851 to £46,350 | 20% |
| £46,351 to £150,000 | 40% |
| £150,000+ | 45% |
Your Personal Allowance is reduced by £1 for every £2 that your net income exceeds £100,000. This means you will not receive a personal allowance if your income is £123,700 or above.
National Insurance Contributions for employees
If you are in employment the standard rate of National Insurance for 2018/19 tax year is:
Class 1
| Earnings | National Insurance rate |
| £0 to £8,424 | 0% |
| £8,424 to £46,350 | 12% |
| £46,351+ | 2% |
National Insurance for employers
If you are in employment your employer will also pay national insurance contributions on your earnings at the following rates for 2018/19
| Earnings | National Insurance rate |
| £0 to £8,424 | 0% |
| £8,424+ | 13.8% |
National Insurance for the self-employed
National Insurance is calculated in a different way if you are self-employed, the following rates would apply for 2018/19.
Class 4
This is based on your self-employed profits and is payable at 9% of profits between £8,424 & £46,350 and 2% for any profits over £46,350.
Class 2
This is paid directly to HMRC (not as part of your tax return).
It can be paid by monthly direct debit and it is charged at a rate of £2.95 per week if your business profits are above £6,205. If your profits are less than this there might be scope to defer paying this National Insurance by applying for an exemption certificate, however this may affect your right to certain state benefits such as state pension and maternity allowance.
Some examples
Let’s look at two examples using two people at different stages of their career:
James – Intermediate Developer
James earns £30,000 as an employed intermediate level developer. Let’s compare with someone who is self-employed making profit at the same level:
| Employment | Self-employed | |||
| Employee | Employer | Employee | Employer | |
| Income Tax | 3,630.00 | 3,630.00 | ||
| Class 1- employee | 2,589.12 | |||
| Class 1-employer | 2,977.49 | |||
| Class 2 | 153.40 | |||
| Class 4 | 1,941.84 | |||
| Total | 6,219.12 | 2,977.49 | 5,725.24 | |
| Total payable to HMRC | £9,196.61 | £5,725.24 |
In this example, the employer saves the largest amount: £2,977.49 by working with James as a freelancer, whereas James could save £493.88 if he switched to freelancing.
Thinking about billability
James makes the switch, and is aiming to charge clients £200 a day as an intermediate self-employed freelance developer. This would mean James needs to work 30 weeks a year (allowing for 5 weeks holiday) to match the £30,000 salary he would have got as an employee (income before tax and NICs would be £47,000 a year).
James would need to assess how much allowable expenditure he would incur as a result of being self-employed, which would affect the amount of profit he would pay tax on as self-employed.
Jasmin – Senior Technical Architect
Jasmin earns £55,000 as a Senior Technical Architect. Let’s look at the tax and NICs compared to a self-employed freelancer:
| Employment | Self-employed | |||
| Employee | Employer | Employee | Employer | |
| Income tax | 10,360.00 | 10,360.00 | ||
| Class 1- employee | 4,724.12 | |||
| Class 1-employer | 6,427.49 | |||
| Class 2 | 153.40 | |||
| Class 4 | 3,586.34 | |||
| Total | 15,080.52 | 6,427.49 | 14,099.74 | |
| Total payable to HMRC | £21,508.01 | £14,099.74 |
Again, the employer saves the largest amount here: £6,427.49 by working with Jasmin as a freelancer, whereas Jasmin could save £980.78 if she switched to freelancing.
Jasmin fancies the extra £980.78 in her pocket per year, and makes the switch to become a self-employed freelancer. Jasmin charges her clients £350 per day, and therefore could generate £82,250 worth of billable work. Again, allowing for 5 weeks holiday, Jasmin would need to be working for 32 weeks on billable work (before deducting expenses) to match the £55,000 salary after tax and NICs deduction.
It is worth noting that any individual in self-employment would have to consider VAT implications if their sales exceed £85,000 looking back over 12 months.
Financial considerations
From a purely financial perspective, there’s not a huge difference between being self-employed and an employed member of staff. However, there are a few things to consider:
Other types of leave
Sickness, parental and compassionate leave are covered when you’re employed, they aren’t when you’re self-employed.
Pension
Most employers need to auto-enrol employees into their pension scheme, and they pay into the scheme too. A self-employed freelancer would need to make their own arrangements.
Staggered payments vs one large tax bill
An employee will have their tax and NICs paid automatically through the employer’s payroll and PAYE. Self-employed freelancers will get one large tax bill at the end of the year. For the more organised, this isn’t an issue. The more frivolous will need to make sure they are keeping money back to pay the tax when it’s due (fines and fees can be applied if it’s late).
IR35
It is very important to consider the implications of IR35 when deciding whether to be self-employed. If the relationship between freelancer and employer looks like an employee and employer for income tax purposes, then IR35 may apply. If the relationship looks like a self-employed contractor and a customer, then IR35 doesn’t apply. IR35 is a contract-by-contract test, so you may have different relationships with different customers. If HMRC considers that IR35 applies then the above examples will not be relevant.
IR35 is a complicated area and there have recently been some high-profile cases including challenges by HMRC. More information on IR35 can be found at http://pwpublishing.practiceweb.co.uk/plusaccountingPWP_APU_Jun18_understanding_IR35.pdf
It’s not all about the cash
It’s clear in the above examples, that both parties, especially the employing agency, would save if the working relationship was when employing self-employed freelancers. From an employer perspective, creating long term relationships, where both sides invest in each other, means the employee model is often the better choice. This also reduces risk and employer costs associated with high staff turnover.
But back to the individual perspective. Work is about much more than cash in the bank. What makes us enjoy work? Here’s some things worth thinking about:
Learning and development
A good employer will carve out time for its employees to grow and learn (cough cough – our team have between 10 and 20% of their time for learning, development and research). Self-employed freelancers need to factor in the cost of training: both the unbillable time and the purchasing of resources. On the flip side, freelancers can choose to take a hit on earnings and take longer learning and development breaks.
Freelancers are also likely to jump between agencies, picking up new ways of working, skills and experiences. Elliot Taylor, a long-term self-employed freelancer we’ve worked with says: “I’ve been fortunate to work on a range of projects and learn from some fantastic teams. You have to be very flexible to jump into an unknown code-base or adopt a new project management processes. This can be exciting and infuriating!”
As a recruiter, when I see self-employed freelancers making the switch to employment, I often ask what gems they have gleaned from other agencies that they can bring to us. Major plus points.
Shah Qureshi (ex-freelancer) says that learning is about give and take: “I joined a team, not just because I wanted to learn, but because I get immense satisfaction from sharing knowledge with others in the team. It’s two way, and sometimes you just miss that as a freelancer. It’s also about staying current. In our industry, things move so fast, so having a team of people looking out for trends and sharing with the rest of us is vital.”
Event attendance
Like learning and development, any time taken out to attend events will impact on billability and may involve high upfront costs for someone who’s self-employed. However, having control over which events you attend, and in what capacity is a bonus of being self-employed.
Sales and marketing
Most good freelancers are in high demand, but there will always be time when one project ends and another needs to be lined up. In order to find potential clients and collaborators, sales, marketing and networking are needed. All take unbillable time, and are specialisms in their own right. The gaps in between projects can be stressful, and while agencies are also prone to fluctuations in client work, they are generally more secure for the employee.
Job description and responsibilities
As an employee, you’ll hopefully have a clear, well defined job description that details responsibilities for your specialist area. While a good employer will allow, even encourage, a certain amount of flexibility as long as the company’s strategic goals are in focus, it’s unlikely the Finance Director will appreciate a junior designer tampering with the company’s year end accounts, for example.
As a self-employed freelancer, you’ll be accountable for every business function. Elliot (freelancer), says: “freelancing requires you to have a wider breadth of skills, some of which might be outside your comfort zone (i’m looking at you book-keeping!). But along with this it affords you a level of flexibility so you decide where to place your focus.”
Support and wellbeing
Setting up strong networks and building relationships when both employed or self-employed is essential to our mental health. Solo freelancers can get isolated unless efforts are made to engage with other people and groups. Martin (freelancer) says: “There’s a feeling of having to be consistently good. You can’t have off days or take your time with anything. One of the biggest things is not always having people to ask if you’re stuck. So you gotta know your stuff.”
Employees are entitled to sickness pay when absent for any illness. Freelancers would be wise to include at least a couple of days a year that they won’t be able to work in their forecasts.
There are some fantastic groups for freelancers to help with potential feelings of isolation. The excellent Farm is a group in Brighton. We’re also big supporters of WP&UP, who provide resources for individuals working in the WordPress community. Meetup.com has a load of other groups (including the excellent WordUp Brighton for WordPress peeps).
It’s complicated
Unsurprisingly, there’s no clear yes or no answer to the initial question, and it’s a lot more complicated than asking ‘which is the higher day rate?’. As Elliot (freelancer) says: “There is definitely a grass-is-greener mentality when comparing these ways of working.”
It will come down to individual preferences and where the decision maker is at in their career. How much training is needed? Do I want to share knowledge? What’s the appetite for risk? How important is a team? How much flexibility is enough?
Then there’s the company or agency that’s being compared – what’s the culture like and are there flexible benefits? With so much being made of the gig economy, and the hunt for exceptional talent becoming harder and harder, agencies that don’t embrace aspects of freelancing that appeal the most are going to struggle.
We’re always looking to chat to potential teammates whether in a freelance or employee capacity, we work with both. To find out more, send me a message using the form here.
* At the recent budget the Chancellor announced that the personal allowance will be raised to £12,500 for the 2019/20 tax year. The figures used in the worked example relate to 2018/19 so from 6th April 2019 the amount of income tax and national insurance due will differ from the above calculations.