Going Self Employed

How do I go self employed?

You may have always dreamed of working for yourself or circumstance means you are now going self employed, you have a business idea so what do you need to do to get set up?

In this article we look at what you need to do to become a sole trader. There are other options such as operating as a limited company, we consider the advantages and disadvantage of both here.

How do I register as self employed?

You need to let HMRC know as soon as possible after you start trading, that you are now self employed.  In real terms you have three months of setting  up your business to register  and certainly no later than by 5th October of the businesses second trading tax year. It is better to get it done sooner rather than later so that it doesn’t get forgotten. If you fail to register you will be fined.

Click here to register with HMRC as self employed

Once you have registered, HMRC will send you a letter confirming your Unique Tax Reference Number (UTR), you need to keep this safe as you will need it to file your tax return.

When do I need to submit a tax return?

The tax year runs from 6th April to 5th April so, once registered, you need to report your income and pay any tax owed to HMRC by the 31st January following the end of the tax year.

Although not due until 31st January,  it is a good idea to prepare and get your return submitted as soon after 6th April as possible as, although you don’t need to pay the bill until 31st January, you will know exactly what you have to pay and have time to get the money together.

When do I need to pay my tax?

Technically by the 31st January following the end of the tax, i.e. the same timescales as for submitting your tax return. However, if your tax bill exceeds £1000, HMRC require you to make payments on account towards the next tax return. An example of how this works is here:

Tax year:  April 2018 - April 2019

Tax due: £2000

Payments are then due as follows:

January 2020: £2000 tax plus £1000 payment on account

July 2020: £1000 payment on account.

The idea being these payments on account will go towards your 2019/20 tax bill. If your tax bill is higher in 2019/20 you would pay the difference in January 2021 along with payments on account for the 2020/21 tax year. If the tax bill is lower you would get a tax refund.

It is always advisable that from the very first day you put away some money for your tax bill so that you don’t find you don’t have any money to pay it when the time comes.

What about national insurance?

As a self employed individual you  generally  pay both income tax and 2 classes of National Insurance Contributions, Class 2 and Class 4. Unlike an employed person, you have to pay all of this yourself and it is not deducted at source. The purpose of the Self Assessment Tax Return is to let HMRC how much you owe.

Income Tax

Income tax is a tax on income. Generally, income that is taxable  includes, employment, self employment, pensions, rent from property, savings and investments. Nearly everyone who is resident in the UK receives a tax free personal allowance and any income earned above this is taxed at the prevailing rates.

Class 2 National Insurance

This is a flat rate which is payable by most self employed people and is paid with your tax  by 31st January.

If you earn below a certain level you may not need to pay these contributions and can apply for a ‘Certificate of Small Earnings Exception’. However, be aware that if you do this, you will affect your entitlement to some benefits such as the State Pension.

Class 4 National Insurance

Class 4 National Insurance Contributions are based on your annual profits and once they are over a certain level you have to pay Class 4 National Insurance Contributions in addition to Class 2. Again, this is paid with your tax bill by 31st January.

Do I need to worry about VAT?

When your turnover reaches a certain level(£85,000 until April 2020) you must register for VAT and complete a quarterly VAT return. Up until the point you don’t need to register, however there are some reasons why it might be a good idea, for example you only sell to VAT register businesses or you want to appear to be a larger business than you are.

What records do I need to keep?

From the very start of being in business you will need to keep records of what you have earned and what you have spent and you must keep these records for 6 years.  These records are then used to produce your annual tax return and accounts.

There are a variety of ways of doing this, you can use a simple spreadsheet or a bookkeeping package. These days, there are many, low cost and indeed free online bookkeeping packages so it is advisable to use one of these.

Whichever route you chose make sure you keep your records up to date and in a format that is easy to read so that it HMRC ever ask for your records you can produce them. It will also make life much easier when you or your accountant has to complete your tax return.

Do I need a business bank account?

As a sole trader you are your business and therefore there is no legal requirement to set up a separate business bank account. However, it is a good idea to do this so that you can clearly see which money relates to your business and which is personal.

What about Insurance?

Professional Indemnity Insurance

Profession Indemnity Insurance offers protection  to individuals and companies against the cost of defending a claim for negligence by a client. More and more these days people are making claims when mistakes are made and this type of insurance protects you against  It is more appropriate for service providers and people who give advice for example, architects,  medical practitioners, solicitors, accountants or maintenance workers.

There are a variety of different schemes and many insurance companies offer specialist cover for different sectors.

Public Liability Insurance

This type of cover provides you against protection where there is a possibility of an accident happening which may result in injury to a third part or their property. Third parties include  customers, suppliers and the general public.

So if you are setting up, for example a photography business from home, you would need to consider this cover in case someone trips over a piece of your equipment and hurts themselves.

Employers Liability Insurance

If you employee any staff, even if you work form home, you must take out Employer’s Liability Insurance. You are legally obliged to do this and need to have at least £5 million cover from an authorised insurer. The cover is designed to meet he cost of any compensation if an employee is injured or becomes ill due to the work they are doing for you.

Other Insurances

Depending on the type of your business and what you do there are many other types of insurance which are tailored to your industry. For example, insurance for tools, business interruptions, key person insurance, contents insurance.

All of these are designed to protect you financially when something goes wrong. As always, it is worth shopping around to get the best deal both on price and to ensure that the cover provided is suitable for your needs.

In Summary

As you can see there is a lot to consider when going self employed so in summary you need to:

  • Register with HMRC
  • Set up you bookkeeping system and record your transactions
  • Set up a bank account
  • Set up insurance 

These are the minimum things you need to consider when getting set up as a sole trader

If you would like help with this, or any other tax matters, simply get in touch and we can arrange to have a FREE, no obligation chat.