Going self-employed can offer freedom and flexibility, but workers may give up more than £6,000 a year in workplace benefits. Research suggests that lost holiday pay, sick pay and employer pension contributions create a financial gap that freelancers must cover themselves.
More than 4.5 million people run their own businesses, managing their schedules and, in some cases, accessing tax-efficient ways to withdraw money from a limited company. Yet the absence of benefits routinely provided by employers can have a substantial effect on personal finances.
According to research by business insurance provider Protectivity, self-employed workers give up an average of £6,428 in workplace benefits each year. Based on typical self-employed earnings, a freelancer would need to work an additional 16.5 days (more than three full working weeks) annually to match the value of benefits received by an employed worker.
Chris Trotman, head of sales and underwriting at Protectivity, said most self-employed workers value the flexibility and autonomy that working for themselves provides. He added that self-employment also carries financial risks that employment automatically absorbs, and that many people do not fully understand the scale of this gap until they encounter it.
Paid Leave, Sickness and Pensions Create a Sizeable Gap
Full-time employees in the UK are entitled to 28 days of paid annual leave each year, including bank holidays. For an employee earning the median salary of £39,039, this represents £4,704 in paid time off.
Sickness can create another financial difference. According to Protectivity, the average UK employee takes 4.4 sick days a year, worth an estimated £740 at median earnings, which would usually be covered by an employer at full salary.
For self-employed people, taking time away from work can mean losing income altogether. The research found that 79% of self-employed people who had a period of sickness absence during the previous year received no income during that time. Self-employed workers also take 35% fewer sick days than employees, not because they are healthier, according to the research, but because they cannot afford to stop working.
Pensions add another long-term cost. Under automatic enrolment rules, employers must contribute at least 3% of qualifying earnings to an employee’s pension, worth approximately £984 a year at the median salary.
Self-employed workers do not receive these employer contributions and must instead arrange their own pensions. According to Protectivity, missed employer contributions compounded across a full working career at a standard annual growth rate of 5% could amount to more than £119,000 in lost retirement savings.
Replacing Employee Benefits Requires Deliberate Financial Planning
Self-employment can also make obtaining a mortgage more difficult because income may fluctuate and can be harder to demonstrate. Stephen Perkins, managing director of Yellow Brick Mortgages, said the early years of running a business can involve lower profits as companies invest and grow, potentially reducing the amount a person can borrow.
Replicating an employee benefits package can itself consume a significant share of income. Anita Wright, a chartered financial planner at Ribble Wealth Management, said reproducing benefits including pension contributions, insurance cover and paid time off can absorb between a fifth and a third of gross income on top of tax.
She said autonomy and tax flexibility can provide compensation, provided these other costs are reflected in the rates charged to clients. Samuel Mather-Holgate, managing director at advisory firm Mather and Murray Finance, said income protection, life cover, private medical insurance, pension contributions, training, holidays and parental leave all need to be deliberately included in fees and paid for.
Some of these costs may be tax-deductible when they qualify as genuine business expenses, while pension contributions can also be tax-efficient. As Mather-Holgate put it, treating self-employment income as take-home pay is the real mistake: self-employed people need to build the employer’s role into their own pricing.
