So, you’ve finally decided – you’re going self-employed! Now you’re wondering how to start, how you register a business and whether you need a formal business plan. Not to mention all things tax-related!
Well, you’re in the right place.
This step-by-step guide will answer all your questions about business basics simply and easily.
Who Am I?
Hi, I’m Anita the founder of Go Self-Employed. I’m a Chartered Accountant with over a decade of experience working with small business owners.
During this time, I’ve specialised in helping new and established small business owners with their self-employment taxes, bookkeeping as well as business planning.
Many of my small business clients were overwhelmed by the concepts of taxes, expenses and bookkeeping.
So, if that’s how you are feeling I can assure you that you’re not alone.
I started this website to share some of my own experiences. Not just with tax and accounting but also from becoming self-employed myself.
My mission is to help small business owners approach their finances with confidence and manage the money they make, while they do the work they love.
Throughout this website, you’ll find lots of free resources for business planning, tax, bookkeeping and accounting.
I’ll help you navigate the many rules and jungle of jargon that surrounds self-employment, so you can be confident you’ve ticked all the right boxes, filed all the right forms, and hit all the important deadlines.
Don’t forget to sign up to my mailing list to get a free bookkeeping spreadsheet. I created it to save you hours of dealing with your bookkeeping and help you keep tabs on how much tax you owe.
You make money doing the work you love. I’ll help you look after it.
I only cover self-employment tax in this guide. Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. Always make sure you contact a qualified professional if you are unsure or have any questions.
So, You’re Starting a Business – Or are you?
Before we get started it may pay for you to check whether you are in business at all.
There are certain HMRC rules that may mean your “business” is actually considered a hobby.
The key difference between a business and a hobby is that hobbyists don’t pay tax or even need to let HMRC know what they are doing.
But generally, if you are starting a new business with a view to making money, then you’re a business owner.
I am going to assume for the rest of this guide you are in business and that’s why you’re reading this guide.
How to Set up a UK Small Business
The easiest and quickest way to set up a small business in the UK is to go self-employed.
It’s quick, free and you can do it yourself online. It also involves the least paperwork.
Self-employment is also referred to as “Sole Trader” or “Freelancing”. There is no difference. They all mean the same thing – that you are doing business as yourself and possibly using a name to trade under.
There are other legal structures out there. The main types include:
- Limited Company
One of these may be more suitable depending on how much you earn or whether you are going into business with someone else. But, be careful, they often carry costs to set up and administer.
Generally, accountants don’t recommend you form a Limited Company until you make £30,000 in profit.
For that reason, many people opt to become self-employed (sole trader) when they are starting out and then form a Limited Company at a later date once their business grows.
But whichever one you choose HMRC will be automatically notified that you are running a business.
How to Register as Self-Employed (Sole Trader)
You are legally required to register your business once your turnover (not profit) goes over £1,000.
Despite this tax break, many people choose to register regardless of their turnover for different reasons, for example, they expect their business to grow beyond this soon or they want to record a tax loss.
The deadline for telling HMRC that you are in business is the 5th October in your businesses second tax year.
A tax year runs from 6 April to 5 April.
So if you started your business on 1 January 2018 then you would need to let HMRC know by 5 October 2018.
Registering as self-employed (or a sole trader) with HMRC is easy enough for you to do yourself.
Tax and National Insurance When You Become Self-Employed
Planning for and calculating your taxes is an essential part of becoming self-employed.
If you have always worked for someone then the subject of taxes may be completely new territory. Your employer did it all for you!
Going self-employed means it’s all down to you to work out how much money you have made and how much tax you need to pay.
Unlike when you are employed by someone, when you go self-employed (or are a sole trader) you can deduct expenses from your income. That reduces the amount of tax you have to pay.
You can’t deduct all your expenses – there are certain ones which HMRC do not let you deduct, even if you paid for them as part of your business.
These are known as Allowable and Disallowable Expenses.
Income tax when you’re self-employed works in the same way to employed people.
You’ll receive a personal allowance (the amount you can earn tax-free) and pay tax according to how much money you have made after deducting for your expenses.
National Insurance works slightly differently for self-employed business owners. You’ll need to pay Class 2 and Class 4 national insurance.
Self-Assessment Tax Returns
So now you know what tax you’re going to need to pay, the next step is understanding how you let HMRC know about your earnings.
Once a year, by the 31st January, you’ll need to send HMRC a Self-Assessment Tax Return.
One tax return covers one tax year. So a tax return for 6 April 2018 to 5 April 2019 needs to be with HMRC by 31 January 2020.
You can choose to use an accountant or do it yourself. It’s entirely up to you. But whichever way you choose, it’s your responsibility to get the form in on time and there are automatic penalties for missing the deadline.
If you choose to do it yourself then the easiest way is to go online. Not only is it quicker, but HMRC will calculate your taxes for you.
Bookkeeping and Recordkeeping
As an accountant, I met many new business owners who were completely overwhelmed by the concept of bookkeeping.
Some were new business owners who were so confused their bookkeeping was completely behind or, worst of all, others had buried their head in the sand and were facing HMRC penalties.
I always did my best to reassure them, help them catch up and set up a manageable bookkeeping routine to keep them on track.
If you are just starting out it’s totally understandable if you aren’t sure what you need to do or even what bookkeeping is.
But trust me it isn’t as daunting as it seems. And there are a couple of things you can do that will make things much easier.
The two best tips I can give you to make your bookkeeping quick and easy are:
- Open a separate business bank account like Revolut
- Set up a bookkeeping system
Registering for VAT
VAT is a tax charged on most goods and services supplied in the UK. It stands for Value Added Tax and the current standard rate is 20%.
There are three different types of VAT rates, which are applied depending on the goods or service being sold.
|Rate||Goods & Services Rate Applies to:|
|Standard Rate 20%||Most goods and services|
|Reduced Rate 5%||Electricity, gas, carrycots, children’s car seats, maternity pads, sanitary protection products, nicotine patches|
|Zero Rate (0%)||Books, newspapers, children’s clothing, certain food & drink, household water|
Businesses with a taxable turnover of £85,000 or more are legally required by HMRC to register for VAT. If that applies to you then once registered you must:
- Charge VAT at the correct rate on everything you sell;
- Deduct VAT you paid to your suppliers from the VAT you charged your customers;
- Pay the difference on VAT paid and received to HMRC, normally quarterly;
- Submit VAT returns using an HMRC approved bookkeeping software;
- Keep VAT receipts.
Being registered for VAT carries more administration and reporting to HMRC. That being said, some businesses choose to voluntarily register for VAT because it brings tax and cash flow benefits.
If that was a lot to take in, don’t worry.
Going self-employed was the best decision I ever made. But it was not without its challenges and I had a lot to learn. And even though I got there, I still learn something new every day.
Use this guide to help get you started and remember that there are plenty of free resources and tutorials throughout my website.
Handling your own self-employment taxes? Then join my mailing list for more tips, tax reminders and a copy of my free bookkeeping spreadsheet. And don’t forget to sign up to my Step-by-Step Guide to Completing Your Tax Return for more help and tax-saving advice.