The rise of the sole trade freelancer

[Note: While a ‘freelancer’ was previously defined as a sole trader, this article refers to its more up to date meaning i.e. a sole proprietor in business for themselves, who may structure themselves as either a sole trader or limited company.]

The increase of dividend tax rates in April 2016 and tightening of rules around workers supplying services to clients via limited companies (known as the ‘IR35 rules’) has led to a rise in the number of freelancers and business owners opting to structure themselves as sole traders (or ‘self-employed’ persons).

Until recently, there had been a common misconception (particularly amongst freelancers) that providing services through a limited company was a sure-fire way of reducing your tax bill. Whilst this can be true, it is certainly not a given.   

Take those in the higher income tax bracket (with profits over £50,271), for example - the marginal rate of tax for Directors drawing down on their company profits in the form of dividends is 52.75% (19% corporation tax + 33.75% higher dividend tax rate) for the 2022/23 tax year.

When compared to the 43.25% (40% higher income tax rate + 3.25% higher NIC rate) marginal rate of a sole trader in the higher tax bracket, you can begin to see why going self-employed might make sense.

For middle income earners, structuring as a limited company can provide a tax saving when compared to a sole trader - usually achieved by drawing a mixture of salary up to the personal allowance (£12,570 for 2022/23) and dividends up the basic rate band (£50,270 for 2022/23) - however, in a worryingly large amount of cases, the additional accountancy fees incurred throughout the year (due to additional compliance burdens like bookkeeping, filing annual accounts, corporation tax returns and confirmation statements) often wipe out any tax benefit obtained in the first place. What’s worse, is that many of those who were unnecessarily advised to incorporate would have also missed out on government support during the covid pandemic.

With UK corporation tax rates (currently 19%) set to increase (to up to 25%) for companies with profits over £50,000 on 1 April 2023, it’s more important than ever to consider your objectives before deciding how to structure your business. The old ways of ‘incorporate and be done with it’ are over.

Of course, there are many other factors to consider beyond tax mitigation - a business structure suitable for one person could be completely inappropriate for another. But there’s no denying that it is the simplicity and flexibility that self employment offers, combined with its competitive (sometimes more favourable) tax rates which has contributed to an increase in sole trade registrations.

If you would like to learn more about how to structure your business, get in touch with Bearstone today.