What does being self employed mean?

There are lots of terminology to get your head around when starting your own business, many of these are important and you should make sure you are aware of these before starting out so you can be prepared for future events.

Two common questions which people find complicated and often puts them off starting a business are: “What does being self employed actually mean?” and “What are the differences between being employed and self employed?”

When you are employed you are working for someone else and being paid a salary for this work. Your income tax and national insurance are deducted from your salary before you receive it and Class 1 and 1a contributions are all paid by your employer. This is a relatively simple, uncomplicated process which, if your employer does correctly there is often no need for you to give it a second thought. All the money you receive from your employer is yours to spend as you wish.

When you’re self employed you are responsible for paying all of your taxes and contributions. These contributions are worked out by calculating the profits you make and any allowances or reliefs you may be entitled to. Class 2 contributions are your national insurance, these are at a flat rate depending on the amount you earn, these can be paid monthly or six monthly. Class 4 contributions will be your income tax in this situation and is calculated once per year through your self assessment. When you’re self employed, the profit you make is seen to be your salary and out of this you need to pay your taxes, after this the money left is your “wage”.

As you can see the financial, tax side of being self employed is a lot more complicated than being employed and having an employer take care of all of your taxes and contributions. If you need further information or help regarding self employment, paying taxes and accounts it would be worthwhile having a consultation with an accountant who will be able to help you make the most of your profits.

You should not let the complications of taxes and contributions put you off starting your own business and becoming self employed as you can easily pay a bookkeeper or accountant to do this for you. There are many benefits of being self employed to look forward to!