Choosing between formal employment and self-employment

This memo provides advice on choosing between formal employment and self-employment based on the tax burden and benefits associated with each option. It compares the income tax payable as an employee of Main Street Consultants Limited and the tax payable when self-employed. It also discusses the advantages of self-employment, such as the potential for business growth and tax relief options. The memo concludes that self-employment is more advantageous.

Option 1: Employed by Main Street limited
Question 1a
Rebecca’s Property Income and expenditure 2019/20 as an employee
Rebecca -
cont.
Property income
W1 £ £ £ £
Property 1
Income 12
months @
575 6,900
Repairs 1,200
Insurance 340
1,540
44/52 1,303
(1,303)
5,597
Property 2 2,840
Income 4
months @
710
Insurance 290
Advertising 670
Loan
Interest 500 (1,460) 1,380
Property 3
Income
Premium 15,000
Rent 4,600 19,600
Expenses
Rent 6,800
Insurance 360 (7,160) 12,440
Property 4
9,000
Expenditure (1,140) 7,860
Total
Property
Income 27,277
Notes 1
Advertising, repair, and insurance costs relate to the time that the property was let out
and so can be claimed in full.

Question 1b
Calculate the total income tax payable by Rebecca for 2019-20
Tax
deducted
Non
savings Savings Dividend Total
£ £ £ £ £
Employment W2 84,325 84,325 36,500.00
Bank
interest 650
Dividends 8,250
Property W1 27,277 27,277
Gross
income 111,602 650 8,250 111,602 36,500.00
Personal
allowance W3 11,990 11,990
123,592 650 8,250 123,592
Taxed as: £
34,500 @ 20% 6,900.00
89,092 @40% 35,636.74
Non savings 123,592
Income
tax
liability 42,536.74
Savings 500 0 0.00
150 0.2 30.00
Dividends 2,000 0.0 0.00
6,250 0.08 468.75
Less: tax
paid (36,500.00)
Tax
payable 6,535.49
W2 £ £
Salary 67,000
Removal
expenses 14,000
Annual
bonus 7,750
Less
allowed
amount:
10,000 @
45p (4,500)

4,100 @
25p (1,025)
2,225
Golf club
Subscription 1,000
Loan 12
000×(4%-
1.5%)×4/12 100
84,325
W3
Total
income
exceeds
£100,000,
so personal
allowance
is abated.
£
PA 11,850
Less:
(107,415 -
100,000) / 2 (5,801)
6,049
Notes 2
PSA is £500 because Rebecca is a higher rate taxpayer.
The £2,000 dividend allowance is available to all taxpayers.
Question 1c
National Insurance Contribution Payable by Rebecca
£
Property 1 insurance 340
Property 2 insurance 290
Property 3 insurance 360
Property 4 insurance 1140
Total 2130
Question1d
National Insurance Contribution payable by Main Street Consultants Limited.
Monthly pay £ 5583.33

Insurance
5121.33 @ 13.8% × 9 months 6062.60
Option 2: Self employment
1. Calculate the total income tax payable by Rebecca for 2019-20, including the tax on the
property income in Question 1.
Tax
Non
savings Savings Dividend Total
deducte
d
£ £ £ £ £
Net profit 58,474 58,474
Bank
interest 650
Capital 27,000
Dividends 8,250
Property W2 27,277 27,277
Gross
income 112,751 650 8,250 85,751
Personal
allowance W3 11,990 11,990
124,741 650 8,250 97,741
Taxed as: £
34,500 @ 20% 6,900.00
90,241 @40% 36,096.34
Non
savings 124,741
Income
tax
liability
42,996.3
4
Savings 500 0 0.00
150 0.2 30.00
Dividends 2,000 0.0 0.00
6,250 0.08 468.75
Less: tax
paid 0.00
43,495.09
Annual
Capital
exemption 11,300
Total
Income
Tax
payable 32,195

W1 £ £
Net profit 67,000
Subscription 375
Donation 395
Miscellaneous
allowances 140
Bank interest 2,400
Annual lease 4,166
Travel
expenses 1,050
(8,526)
58,474
Rebecca -
cont.
W2 £ £ £ £
Property 1
Income 12
months @
575 6,900
Repairs 1,200
Insurance 340
1,540
44/52 1,303
(1,303)
5,597
Property 2 2,840
Income 4
months @
710
Insurance 290
Advertising 670
Loan Interest 500 (1,460) 1,380
Property 3
Income
Premium 15,000
Rent 4,600 19,600
Expenses
Rent 6,800
Insurance 360 (7,160) 12,440
Property 4
Rent income 9,000
Expenditure (1,140) 7,860

Total rental
income 27,277
W3
Total income
exceeds
£100,000, so
personal
allowance is
abated.
£
PA 11,850
Less: (107,415
-100,000) / 2 7,125
18,975
Notes 3
PSA is £500 because Rebecca is a higher rate taxpayer.
The £2,000 dividend allowance is available to all taxpayers.
Annual capital exemption of £11 300 is for every tax payer.
2. Employee National insurance Contribution.
Net profit in 12 months = £ 76 635
1 month = (76 635×1) ÷12 months.
= £ 6 386.25
Up to £ 702 Nil
3160.90 @ 12% 379.3
2523.34 @ 2% 50.5
Total 429.8
3. Employer National insurance contribution.
Up to £ 702 Nil
5684.25 @ 13.8 % 784.40

SECTION B: BUSINESS MEMORANDUM
Office of Tax consultant
Internal Revenue Service
Memorandum
Number: 201903111
Release Date: 17/3/2019
Address:
UILC: 8501.02-02
Date: March 17, 2019
To: Rebecca Oliver
Retail Analyst
From: Name:
Tax Consultant
(Chartered Accountants, Harrison & Hawes LLP)
Subject: Choosing between formal employment and being self-employed.
The advice herein is a response to your request for help dated January 4, 2019. Please
Note that the advice given in this memorandum cannot be cited or used for any other
justification purposes.

ISSUE
To determine which option will bear a less tax burden between taking a job at Main
Street Consultants limited and starting a private Consultants firm basing in the income tax
computed from the two options.
CONCLUSION
The income tax payable as an employee of Main Street Consultants Limited is £ 6 535.49.
On the other hand you will have to pay £ 32 195 when self- employed. In addition, apart
from paying insurance for your four property, you will l have to pay for your
National Insurance and that of your spouse and son
since they are denoted as your employee as per option two. This amount will be paid by
your employer if you decide to take the job at Main Street Consultant Limited. Even if the
benefit form a formal job are more, and the tax burden when employed is less, taking the
second options is more advantageous.
FACTS
In your capacity as the sole proprietor, there are lots of ways you can employ to attract new
clients. You can do a lot of marketing to ensure that you have reached out to all potential
customers. An influx of more new clients signifies increase in profits and a generous
reward
for your efforts. When running your own business, it means that you will be able to enjoy
the benefits associated with business growth. Any significant growth of the business will

mean an increase in profit and thus increase in your income. This is contrary to the
employment whereas irrespective of how hard you work; your annual salaries will remain
the same even when there is an improvement in the annual profits of the business. No
reward for any extra efforts (Izawa, R. 2015).
Furthermore, since your business is a sole proprietor, there are few formalities required to
start the business as for sole proprietor, the business and the owner are not viewed as
separate entities and thus the liability of the owner to the business is unlimited. On the side
of taxes, only liable income tax will be
taxed. There are no other taxes such Pay As You Earn as compared to formally employed
people. You won’t be taxes on your personal dividends, loan or bond interests, and savings
accounts
As a way of minimizing your tax liability even further, you can use the following legal
Mean of tax relief
Capital Allowances. Capital allowance is a kind of tax relief that is claimed on
capital assets such as machinery, fixtures and fittings, and cars. In your capacity
as a sole proprietor you can claim up to one hundred percent of the taxable
expenditure. Capital allowances claims should be optimized in any manner
possible claiming all available allowances. The area where you can maximize
capital allowances include sales, purchases, repair and new business investments.
Business Property Relief (BPR). BPR is has the potential to remove the whole
value of business in terms of tax relief. Every business owner is eligible for this

type of relief. However, some conditions like disclosure of startup capital have to
be met before you fully qualify for this kind of relief.
Nevertheless, you will still have to pay property tax on your four apartments. The reason
for this is because you they are personal premises not business inventories. Other
additional taxes that you will have to pay are sales taxes and excise taxes. The rates at
which you will pay these taxes will depend on your level of revenue and how you use
commodities that \re levied with taxes.
Despite the advice in this memorandum, there some unforeseen contingency that you will
have to bear with. Some of these uncertainties include changes in tax rates, change in
regulations relating to tax. The other uncertainty is that this memorandum is written on
the assumption that you do not have any pending tax liability. Accrued taxes attract high
fines and penalties.
My final advice will be you consider self-employment because it comes with so many
other benefits. You will enjoy the freedom of being your own boss and you would suffer
the stress of employment pressure. You will be able to employ some people as the
business grows and thus help in creation of employment. When you run your own
business, You will earn profit and not salary. Profit is not constant since it will grow with
the growth of the business and the earnings will not be like salary which might remain
constant even the company you are serving is making super normal profits (Billings, M.,
& Oats, L. 2014)
Finally, after the comparison of the two options, please go for self-employment.

References
Billings, M., & Oats, L. (2014). Innovation and pragmatism in tax design: Excess
Profits Duty in the UK during the First World War. Accounting History
Review, 24(2-3), 83-101.
Izawa, R. (2015). The Formation of Companies for Tax Avoidance: The
Relationship between UK Multinationals and International Double Taxation in the
Interwar Period. In Business History Conference. Business and Economic History
On-line: Papers Presented at the BHC Annual Meeting (Vol. 13, p. 1). Business
History Conference.
Ivanova, M. (2018). The Multilateral Instrument: Avoidance of Permanent
Establishment Status and the Reservations on behalf of Australia and the
UK. Revenue Law Journal, 25(1).