Written by Ray Coman
Recent years has witnessed a large movement of individuals from being employed to providing services via a company. The tax benefits have been widely covered on this website. However, such tax benefits come at ‘price’, when compared with the 'cost' of ceasing to be in employment. In broad, and somewhat subjective terms, an employment position carries some of the following advantages:
- More family friendly, working patterns. With statutory paid holiday entitlement and sick leave, an employment role encourages at least some work life balance.
- A greater show of commitment to your employer. The mutual obligation implied by the employment relationship is an expression of loyalty.
- The possibility of working for an organisation with better personnel planning. This tendancy is, arguably, a result of a more clearly identifiable workforce.
- Job security brought by the statutory contract terms. Notice, a concept peculiar to employees, and the protection of employment law forces employers to consider their human resource plans carefully.
- Employment brings peace of mind about your working status, given the ambiguity from HMRC about their stance towards the old IR35 rules.
- In some cases, employment is a more effective route to greater seniority. For instance, a board member must be a director of the company, and not of their own company.
- Improvement in cash flow. With tax deducted at source, net income is easier to understand. As a result, personal finance planning could be improved.
- It can be more straightforward to secure a mortgage, because income is easier to demonstrate.
- Reduction in accounting costs.
- Participating in a less risk taking culture. Where employment forces people to work together in diverse teams there could be greater opportunity for consensus driven and stable decision making.
- Greater entitlement to damages, for instance for wrongful dismissal or discrimination. Most of such compensation payments will be tax-free.
- In practice, expenses are more likely to be reimbursed by an employer than by a client.
- Employees are a preferred creditor in the event of insolvency and there is lower risk of bad debt.
- The perks of the job, such as private medical insurance to invitation to staff events.
- An employee is usually covered by their employers' indemnity policy and therefore at less risk of financial loss resulting from legal action.
In addition to the improvement in working conditions, there are various tax benefits of being an employee, such as:
- The first £30,000 of redundancy payment is tax free.
- Eligibility for taking part in employee share schemes, such as: Save as You Earn (SAYE), Enterprise Management Incentives (EMI) and Company share option plans (CSOP.) Such share remuneration can have a number of tax benefits.
- Significantly lower possibility of penalties for being late with HMRC and Companies House.
- While it is possible to make pension contributions as a contractor, the discipline of an occupational pension scheme ensures that the tax benefits of a pension are actually taken.
- Lower risk of penalties for inadvertently falling foul of HMRC. The onus of responsibility for the paying the correct amount of tax transfers to the employer.
- While national insurance is higher as an employee, entitlement to a higher state pension will also increase.
The exact nature and extent of the loss of employment status will be different for each individual. However, as a minimum, offering services via a company should provide an opportunity for higher compensation, if only due to the savings in employers’ national insurance enjoyed by the client