New government guidance relating to taxes for the self-employed is making things even more difficult for those that work for themselves. Coupled with rising numbers of people choosing to become self-employed, now is a pertinent time to take a broad look at the best way for this demographic to organise finances and optimise outcomes.

The ‘Solo’ Self-Employed Movement

According to a report from the Institute of Fiscal Studies, the number of ‘solo’ self-employed – sole traders and owner-managers with no employees – in the UK is among the highest in OECD countries. Solo self-employment also accounts for over a third of all employment growth since the onset of the financial crisis but the solo self-employed earn less than employees on average and the gap has widened over time.

Median pre-tax earnings among the solo self-employed in 2018–19 was 30% lower than those among employees yet a huge one in nine workers in the UK today is a sole trader with no employees.

How has COVID-19 impacted self-employment figures?

With crafting one of the most common hobbies adopted during lockdown, this trend has evolved into the wider, more conventional workspace. A new report by Amazon Handmade reveals that one in five (18 per cent) of those who took up creative hobbies during the pandemic have been inspired to leave full-time employment to sell their goods.

Britain saw the biggest increase of new handmade artisans in a decade last year, with a 33 per cent increase in self-employed crafters between 2019 and 2020 alone.

This growth contributed to an overall rise of 21 per cent more makers setting up handmade businesses over the last ten years.  A desire for more creative fulfilment and greater career autonomy were the most common reasons cited for this move, underpinning a wider transition in the workplace towards higher numbers of self-employed workers.

An increase in people moving out from busy urban areas to rural climes and a desire for a healthier work-life balance in the wake of COVID-19 have also contributed to the changing face of (self-)employment.

Changing Taxation

While research shows that the self-employed tend to have greater wellbeing and job satisfaction, the same cannot be said for their financial situation. Self-employed workers and small business owners are being hit hardest by government efforts to repair the economic damage caused by COVID. Increases to national insurance and dividend taxation of 1.25% will be introduced from April 2022, while announcements have also been made regarding IR35 reforms and proposed corporation tax increases.

The Autumn Budget saw further bad news with the announcement that HMRC has launched a consultation on changing the basis of self-employed taxation. They are proposing to change tax liability where instead of it being based on profits in the 12 months ending on your accounting date, they plan (from 2023/24) to tax actual profits made in the tax year.

While the changes were presented as a way to simplify a complex system, Rishi Sunak has been accused of imposing a ‘stealth tax’ on the self-employed. This could translate to an average extra bill of more than £3,000 for half a million self-employed people covering the 2022/2023 transitional year, as they pay tax on more than a single year’s profit.

Loss Carry Back Provisions

Guidance has also been issued on the new extended loss carry back provisions. The Government introduced legislation in Finance Act 2021 that provides a temporary extension to the loss carry back rules for trading losses of both corporate and unincorporated businesses.

The latest guidance states that for trade losses made in the 2020/2021 and 2021/2 tax years only, unrelieved losses can be carried back and set against profits of the same trade for three years before the tax year of the loss. This is compared to a previous maximum period of one year. Losses must be set against profits of most recent years first before carry back to earlier years.

Financial Planning Review

With such a raft of changes taking place, we strongly advise self-employed individuals to review their investment and savings arrangements. Without the additional structure and security that full-time employment brings, it can be challenging to establish long-term financial plans and build retirement assets.

However, with the help of our specialist financial planning team, we can effectively navigate the financial issues faced by many self-employed clients. These commonly include fluctuating income and low pension savings due to lack of employer contributions.

We will help you to create a realistic savings structure with the view to achieve key financial goals and a strong pathway towards growth. We can also discuss more individual retirement ambitions such as phased retirement.

Disclaimer: The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Wealth Management or its associated representative shall not be liable for any technical, editorial, typographical, or other errors or omissions within the content of this communication.