What is the real reason behind the UK’s falling unemployment figures?

What is the real reason behind the UKs falling unemployment figuresIs the UK’s steadily falling unemployment rate being driven primarily by a rise in self-employment, rather than a recovery of permanent jobs?

Depending on who you speak to, employment figures are either great news or a disaster.

With imminent election, the Government is happily repeating the falling unemployment figures to anyone who will listen, but bodies such as the Trade Union Congress have issued alarming reports that Britain’s now-4.7 million-strong self-employed workforce lack job security and employee rights, earn well below the average wage, and have started their own business due to a lack of better options.

Often with political issues such as this, the real answer lies somewhere in the middle. However in this case it looks as though both parties could be telling the truth, but talking about different things.

The numbers problem

Self-employment numbers as reported by the Office for National Statistics aren’t concrete figures – they’re the result of sample surveys.

So the ONS numbers aren’t recording the exact number of sole traders, umbrella contractors, limited company directors or any single specific legal entity – they’re recording the number of people that identify as self-employed.

UK self-employed

We know from available research that sole traders are more likely to identify as self-employed, while limited company directors are more likely to see themselves as “business owners” or “company directors” – even if they’re running a company of one. So it’s relatively safe to assume those classed as “self-employed” by the ONS are sole traders.

But what about the limited company freelancers and contractors? It would appear they’ve been largely excluded from the debate up until now.

Attempting to compare sole traders and one person limited companies is where we encounter the biggest problem in the self-employment debate. The data we need to get the whole picture is split between the ONS Labour Force Statistics, HMRC’s Self Assessment receipts and Companies House data.

What are people actually earning in the UK?

According to HMRC’s Personal Income Statistics, the average income for a self-employed person in the UK is around £13,500 per year – which would seem to back up the TUC’s “low paid jobs” line. However this group’s average earnings is weighed down by a huge number of people who earn very little (a few thousand pounds per year) through their self-employment. This group – over a million of them – are the moonlighting freelancers, doing work here and there to supplement their income.

As to what the average full-time sole trader earns, it’s very difficult to tell. Tax Research estimates around £19,000.

But again, what of the limited company brigade? We know that 43.5% of limited companies in the UK are freelancers and contractors. Based on that ratio about 230,260 one-person limited companies were formed in 2013/14 (about 35,000 more than the previous year). In the same period roughly 326,000 people became sole traders.

We know that one-person limited companies earn on average £58,200 per year. Compare that to the Tax Research figure of £19,000 for sole traders and it seems we’re looking at a two-speed self-employment boom.

High earners quitting day jobs

On one hand, high earners are quitting their jobs, incorporating, and earning more than twice the national average wage. These are the entrepreneurial go-getters that Osborne and Cameron love to lionise.

On the other hand, those taking their first steps into self-employment are sole trading, earning a somewhat lesser wage (below the national average in many cases) and missing out on employee rights and job security. This is the group the TUC and others are concerned about.

To attribute the entire self-employment boom to either group is patently inaccurate – however this kind of nuance tends to get lost in political debate.

Do sole traders earn less than limited company directors?

Based on the available data we can conclude that sole traders earn significantly less than Limited Company Directors – and the former group is growing faster. This trend could change over time though, as those who have been freelancing longer tend to earn significantly more.

The TUC’s claim that the UK’s burgeoning ranks of self-employed workers are going it alone out of necessity doesn’t appear to wash, though.

A survey by RSA found only 15% chose self-employment due to a lack of better options (over 50% chose it “to have more freedom”), Global Entrepreneurship Monitor found the number freelancing out of choice was five times higher than those forced into it, and the Resolution Foundation reported that almost three quarters (72%) of newly self-employed professionals prefer it to salaried work.

It may be a while yet before the UK’s exploding self-employed population is fully understood – not least due to the problems understanding how they work and what they earn. It seems clear from the available data that the vast majority enjoy their job but, just like full-time employees, will have to wait for their wages to recover to pre-recession levels.

How to maximise your earnings

Of course, everyone’s work situation is different and advice will differ from client to client – we are here to help provide guidance whatever your circumstance may be.

Contact Omni Chartered Accountants today for more information.


Can I switch from being a limited company to sole trader?

Limited Company to Sole Trader

 Here’s a typical question…

“I bought and took over a small business back in 2010, which was a limited company. Turnover has diminished so a lot less admin is needed. Is it possible to change a limited company to sole trader?”

 Here’s the answer!

 Can I switch from being a limited company to sole trader?

1.    Striking off a limited company from the Company Register

A limited company can cease trading at any time but as it has a separate legal entity it has to be removed from (or ‘struck off’) the Register of Companies.

Before that can happen, financial reports up to the date of cessation must be prepared and filed and any outstanding corporation tax paid. If there are any unrelieved corporation tax losses (losses accumulated not yet offset against taxable profits), these will be lost.

2.    Asset disposal and liability settlement

In addition, any remaining assets must be disposed of and liabilities must be paid. Assets can be ‘sold back’ to you. This includes items such as a website and email address.

3.    Dealing with the VAT and PAYE

If the company is VAT registered you should check if it is possible for the registration to be transferred to the Sole trader. As you purchased a business there may be some goodwill remaining which will have to be written off. Any PAYE scheme must be closed.

4.    Closing company bank account

After the final payments of tax and other liabilities, etc. the bank account must be closed. It is possible to apply to HMRC that any distributions (usually the bank account balance) can be treated as a capital gain subject to capital gains tax instead of income tax. Generally there is a tax saving on this.

However this can be complicated so you should talk to your accountant for the best advice. In any case, this can only be done when the company is closing down and not at any other time.

5.    Notify HMRC and other parties

If the business is transferred to a sole trader you will need to notify the existence of the new business to various agencies such as HMRC. Arrangements to have insurances transferred to the sole trader business will also have to be made.

The payments on account regime for Income Tax for sole traders is particularly onerous in the first year or two of trading, so you will have to put by a percentage of income (approximately 20 per cent) to make the payments when they fall due.

Seeking advice makes this whole process easier!

Of course, this whole process can seem quite a daunting one, so it makes sense to seek professional advice if you can.

Omni Chartered Accountants are experts in all areas of small business accounting and taxation advice, and can offer free of charge advice to help you make the right decision and also offer a cost-effective solution to dealing with the stages that are required to make the transition from Limited Company to Sole Trader.

Call 01902 837408 today or request a free of charge call-back from our website for an initial consultation – alternatively, click here to contact us via our dedicated client contact form.