Becoming self-employed in the UK now accounts for 15% of the workforce and it’s on the rise.
But whilst starting your own business is an exciting time, you can be confronted with financial, tax and legal rules which you are not familiar with.
In this simple guide, I will show you how to go self-employed as well as answering some of the main questions about legal structures, licences and taxes.
Ready to go self-employed? Let’s get started…
How to Register a Business in the UK
The easiest way to register a business in the UK is to go self-employed.
It’s quick, free and you can do it yourself online.
There are other types of legal structures available including:
- Limited Company
Choosing the right legal structure for your business will depend on your personal circumstances and will affect how much tax you pay, your legal responsibilities and personal liability.
Becoming self-employed means you are running your business as an individual and are personally liable for all of the business’ debts. You’ll also have to work out your own taxes and report your earnings to HMRC using a self-assessment tax return form (more on that later).
Generally, accountants don’t recommend forming a limited company until your taxable profits reach around £30,000 per year. But you may want to incorporate a Limited Company for other reasons.
If you are unsure what legal structure is right for you or are working with business partners, then seek professional advice to help you decide what is right for you.
How to Register as Self-Employed Online
Before you start registering as self-employed online, make sure you have your National Insurance number handy.
You’ll then need to complete the following steps:
- Visit the HMRC website and choose the option to “Register Online”;
- Set up your HMRC online account so you can manage your taxes online;
- Enrol for self-assessment online;
- Wait for your UTR number to be posted to you (can take up to 10 days)
- Wait for your activation code so you can complete setup of your HMRC online account.
Keep your UTR number and login details for your HMRC online account safe.
Need my help? Here’s my video guide to help you register as self-employed
When Should You Register as Self-Employed
You are legally required to register your business once your turnover (not profit) goes over £1,000.
Although many people choose to register from the beginning 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.
How Tax and National Insurance Works When You Go-Self Employed
When you become self-employed the amount of tax and national insurance you pay depends on how much profit you have made.
Profit means all your business income less allowable business expenses.
Tax for the self-employed works in the same way to employed people. The key difference is you will have to work it out yourself.
You’ll receive a personal allowance (the amount you can earn tax-free) and pay tax according to how much money you have made.
Here are the income tax rates for 2019/2020 so you can calculate how much you’ll need to pay:
|0% tax (personal allowance)||on the first £12,500||on the first £11,850|
|20% tax (basic rate)||on the next £37,500||on the next £34,500|
|40% tax (higher rate)||on the next £100,000||on the next £103,650|
|45% tax (additional rate)||on everything over £100,000||on everything over £103,650|
National insurance works differently when you go self-employed. You’ll need to pay:
- Class 1 National Insurance and;
- Class 2 National Insurance.
Similar to income taxes, the amount you pay of each depends on your business profits (with an amount you can earn before any NI kicks in).
Here are the national insurance rates for 2019/2020 so you can calculate how much you’ll need to pay:
|Class 2 National Insurance||£3.00 per week on profits over £6,365 per year|
|Class 4 National Insurance||9% on profits between £8,424 and £50,000|
2% on profits over £50,000
However much tax and national insurance you need to pay, it’s important that you set aside enough money for your tax on a regular basis.
Your tax and national insurance must be paid by 31 January each year, along with a completing a tax return that details all your income and expenses.
In addition, you may need to make a payment on account towards your next years tax bill on 31 January and 31 July each year.
This means in your first year of self-employment you may need to pay double in taxes.
How to Raise Your First Invoice
The purpose of an invoice is to get you paid.
It’s a legal document that you need to send your customers so that they can pay you. Not only that, it’s a way of keeping track of your income and who owes you money.
Whilst an invoice needs to contain certain essential information, the format it takes and how it is generated can be done in many different ways. The one you choose will be the one that suits your business.
The main four ways you can produce your invoices are:
- Online invoicing systems
- Bookkeeping softwares & apps
- Word or g docs
- Excel or g sheets
Once you raise your invoice you’ll then need to decide what methods you are going to offer your customers to pay you.
Again there are a number of different options and the ones you choose will be suitable for your business and the industry you operate in.
Businesses tend to offer one or more of the following:
- Bank transfer
- Credit card
How to Insure Your Business
Business insurance is different from personal insurance. It is specific to your business only and is protection for things like:
- Damages to you and anyone else you or your products come into contact with;
- You home if you work from there or have clients visit you.
There are 7 main types of insurance:
- Professional Indemnity
- Public Liability
- Product Liability
- Business Equipment
- Business Interruption
- Employers Liability
- Business Motor
It’s unlikely that you’ll need them all. But when you go self-employed it is sensible to protect yourself and others around you. You don’t want to be faced an expensive lawsuit or having to replace expensive equipment that goes missing.
How to Handle Your Bookkeeping
When you become self-employed you are legally required by HMRC to track all your income and expenses, as well as calculate your own taxes.
This is basically what bookkeeping is – a way of adding up everything you have been paid and your costs.
Keeping on top of your bookkeeping regularly helps you to:
- Check who owes you money;
- Have a clear picture of your costs;
- Understand how much money you have made;
- Budget for your taxes and national insurance;
- Avoid tax hell when it comes to completing your tax return.
You can do your bookkeeping in a number of ways, some being more suitable for self-employed individuals than others.
There are three main methods you can choose from to do your bookkeeping:
- Banking apps
- Bookkeeping software
- A spreadsheet in excel or g sheets
The one you decide on will mainly depend on what you want to track and pricing.
Read my complete guide to bookkeeping to help you decide.
What licences do you need when you go self-employed?
The exact licences you need depends on the type of business you are planning to run and where you will be based.
If you plan to work from home, then you should check your mortgage or rental agreement to make sure you are not in breach of any rules.
Do you need a business plan when you start a business?
A business plan can be useful. It is a document that details out information on your business, what you do and where you plan to be in the future.
Although it is not necessary, it can help you analyse your business and set goals.
Business plans generally include 7 essential sections and if you want to prepare one, there are some useful resources to help get you started on the HMRC website.
Can I Claim Benefits When I’m Self-Employed?
Certain benefits are available when you’re self-employed. They can help supplement your income if you are just starting out or are having a quiet time at work.
- Working Tax Credits
- Tax-Free Childcare
- Maternity allowance
- Universal Credit
- New Enterprise Allowance
- State Pension
It is important to note that you may not be able to claim certain benefits if you have not paid Class 2 National Insurance, even if you earned below the threshold. It means many people choose to voluntarily pay Class 2 National Insurance contributions, regardless of how much money they have made.
What are Allowable Expenses?
Allowable expenses are business costs you can claim to reduce your tax bill. Most of your spending will be an allowable expense but there are certain things you won’t get tax relief on including:
- Client entertainment;
- Your daily lunches;
- Anything you use personally;
- Fines and penalties;
- Personal clothing;
- Travel between home and your base of work.
Do You Need to Name Your Business?
When you are self-employed you are not legally required to name your business. That means you can choose to trade under your own name.
Some people opt to use a name that means they add “trading as” and their business name.
Here are some dos and don’ts when it comes to naming a business.
Do I need to register as a sole trader again for my second business?
No (unless you are starting a limited company, in which case you’ll need to register that separately with companies house).
You’ll just need to fill out a separate self-employment section when it comes to completing your tax return for each business you are running.
Register twice and HMRC will expect two tax returns from you!
What is the Self-Assessment Tax Return Deadline for 2019?
The tax return deadline for filing your self-assessment online is 31 January. If you fill out a paper tax return the deadline is earlier on the 31 October.
What Happens if You Miss the Self-Assessment Deadline?
There are penalties and interest if you miss the 31 January self-assessment. You’ll be charged penalties for failing to file your tax return, as well as penalties and interest on any unpaid tax.
Penalties and interest will continue to rise at set amounts until you file your return and pay any outstanding tax.