The UK is home to over 4.39 million freelancers, according to data from March 2023. Offering both work-hour flexibility and the ability to set your own rates, self-employment has become a popular choice in recent years. While self-employment might seem like the obvious choice for businesses and workers looking for short-term contracts, there are several important factors that both parties should be aware of when taking a freelance route.
From potential wage exploitation to being left responsible for unpaid taxes, there are a variety of reasons why freelancing may not be the best solution for both companies and workers alike.
In a new article published by the digital staffing platform Coople, they revealed the employee rights and tax responsibilities that freelance workers have in the UK, alongside warning companies using self-employed workers about the risk factors that exist when classifying freelance workers from company employees.
What are freelance workers?
One of the most important things to remember about freelancing is its definition. For both legal and taxation purposes, freelancers are defined as ‘self-employed individuals. They are solely responsible for setting their own working hours and pricing rates and ensuring that any agreed-upon work is completed to a satisfactory standard.
Essentially, a freelancer is someone who is fully responsible for maintaining their quality of work – alongside liaising with clients, paying their own taxes and National Insurance contributions, managing their schedules, and ensuring that contracts are drawn up in order to get paid for their work.
While this working style offers more flexibility surrounding working hours and pricing, those acting as freelancers have a significant amount of administrative work that those hired on as employees do not have to worry about.
Risk factors for the self-employed
Not only does self-employment come with an additional amount of admin outside of completing the agreed contracted work itself, there is also a range of risks that freelancers should be aware of before deciding whether this working style is truly the right fit for them.
The first factor to be aware of is that both tax and National Insurance are the responsibility of the freelancer, meaning that this can be a time-consuming process that runs the risk of a fine if not done correctly.
Freelancers are responsible for declaring their income and paying their own tax and National Insurance contributions on an annual basis – so they must be vigilant about keeping track of the tax they owe to HMRC and ensuring that it is paid. Failure to pay the correct amount of tax can result in severe fines. And submit them to HMRC on time to avoid being penalized for tax avoidance.
Additionally, as self-employed individuals, freelancers are not entitled to worker benefits that protect them from exploitation at the hands of the companies hiring them – such as minimum age, maternity leave, pension contributions, or statutory sick pay. This means that freelancers are at an increased risk of being exploited, particularly in terms of undervaluing their services in situations wherein they are unable to set their own pricing terms.
Businesses risks associated with using freelancers
Similarly, there are also risks associated with hiring freelancers on the business side. For example, misclassifying employees as freelancers can result in the company being held responsible for any unpaid tax on the employee’s end.
The UK government determines who can be defined as ‘self-employed’, as this has the potential to be used as a means of avoiding paying taxes. To prevent this, an assessment process called the «IR35» was introduced by HMRC to determine whether a freelancer providing a service to a company is genuinely self-employed or instead needs to be treated as an employee.
Previously, freelancers were responsible for self-assessing whether their services constituted genuine freelancing. However, as of the 6th of April 2021, the responsibility for the «IR35» procedure has fallen mostly on the shoulders of private-sector companies and public-sector authorities instead.
The wrong classification during this process can result in fines for companies inappropriately labeling their employees as freelancers, alongside being held liable for any unpaid tax and immediately needing to implement employee benefits.
Not only can this have significant financial implications for companies, but should they be found to be mislabeling employees as self-employed – failure to correctly pay employees can also cause damage to a company’s reputation. However, according to the freelance report, only 30% of companies are aware of these employee and independent contractor misclassification risks.
Can outsourcing to a staffing agency negate risks?
Thankfully, there are measures that can be taken to reach a happy medium between companies and workers. The risks covered thus far can largely be avoided by outsourcing the hiring process to a digital staffing agency – such as Coople – which negates the need to hire freelancers but still provides the same level of work flexibility for both sides.
Digital staffing agencies provide a way for companies requiring short-term hires to find a solution that meets their business needs without putting themselves at the financial risk associated with contracting freelancers. Similarly, these agencies also ensure that employee rights are protected – and that workers cannot be exploited by their employer, as is unfortunately possible with those that are classed as self-employed.
Placing hiring responsibility with a staffing agency allows companies to remain in control of who they are hiring while also ensuring that workers are able to select companies that fit their own requirements.
Additionally, using a digital agency also means that employees do not have to undergo the «IR35» assessment process, nor do they need to worry about paying their own taxes or National Insurance contributions. Instead, this is paid via PAYE by the agency itself, which acts as their legal employer.
Since those hired through staffing agencies are classified as employees, this also means they are entitled to the workplace benefits that are given to employees in the UK – including being guaranteed a minimum wage, maternity and holiday leave, statutory sick pay, and receiving pension contributions.
Yves Schneuwly, Group Chief Commercial Officer at Coople, comments:
“While freelancing can offer increased flexibility surrounding work hours and pay that is desirable to many, being self-employed comes with a significant amount of admin and can also lead to exploitation or the risk of penalty fines.
“Freelance workers are not entitled to the same employee rights and benefits that regular employees receive – including minimum wage. While many set their own pricing, not all are in a position to do so – which can leave them vulnerable to exploitation from companies using their services.
“Undervalued work can be a big problem for those working for themselves, and a lack of protection from employee laws means that there is very little that can be done if their client sets a low price during contract negotiations.
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“Additionally, freelancers are financially responsible for their own tax and NI contributions. Failure to pay the correct amount can result in severe fines. “Ultimately, there are a lot of factors to fully consider before rushing into self-employment. Though freelancing can offer desirable lifestyle benefits, there are always risks associated that ordinary employees do not have to worry about.”