Are you ready to start working for yourself? If you want to know what steps you need to take to officially go self-employed, then keep reading! In my Beginners Guide to Going Self-Employed in the UK, I’ve outlined the essential information you need to take to make things legal, as well as what happens once you register as self-employed. I’ll include how taxes work, claiming back expenses and declaring your income to help you overcome any challenges of going self-employed.
To avoid confusion, I haven’t used any jargon, but there is quite a lot of information so you may want to bookmark this page. This makes it easier to come back to as you work through each stage of your self-employed journey.
Friendly Disclaimer: 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. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
Table of contents
- 1. Are You Considered Self-Employed?
- 2. Is Going Self-Employed Right for You?
- 3. What Business Structure Should You Choose?
- 4. When to Register as Self-Employed
- 5. Should You Open a Business Bank Account?
- 6. Should You Get Insured? And How Do You Do That?
- 7. How Taxes Work When You Go Self-Employed
- 8. Do You Need to Charge VAT When You’re Self-Employed?
- 8. Tax Deadlines to Be Aware Of
- 9. Invoicing Clients When You’re Self-Employed
- 10. How to Tack Your Income & Expenses
- 11. Self-Employed Pensions
1. Are You Considered Self-Employed?
Before you register as self-employed, it’s wise to check that depending on what you plan to do. This includes whether you are actually considered self-employed and the money you will receive counts as taxable income. Not all income is taxable. For example, in some rare cases businesses may be considered a hobby that HMRC doesn’t recognise. It’s also worth remembering that the trading income allowance lets UK taxpayers earn up to £1,000 in income (not profit). This means you could avoid the need to register with HMRC altogether to declare your earnings.
If you are struggling to decide whether you are self-employed then read this guide to check if you are considered self-employed. I’ve also listed questions you can ask yourself to help you decide on your tax status to further help you.
2. Is Going Self-Employed Right for You?
Before you take the leap into self-employment and fill out all the paperwork, it will help to check that being your own boss is right for you. The world of self-employment and starting a new business isn’t always as glamorous as it first seems; downsides can include feeling lonely, facing times without work or an empty bank account while you wait for your clients to pay you. That said, there are many upsides from doing the work you love and having the freedom to work where you want when you want. Weigh up the pros and cons of going self-employed to make sure it’s the best move to make.
3. What Business Structure Should You Choose?
The first step to legally becoming your own boss is to decide on the most suitable UK business structure. The most common types of UK business structures, which you’ve no doubt heard of, are:
- Self-employed (or sole trader)
- Private Limited Company
- Limited Liability Partnership
The quickest way to get started is to register as self-employed. However, depending on your earnings and if you have a business partner, forming a Limited Company can save you tax rewards. In addition, it can offer you certain legal protection as well as formalise ownership between you and your business partner(s).
Need a hand deciding? This guide about Sole Trader or Limited Company contains access to a free tax calculator to help you work out which business structure will help you to pay less tax.
Owning a Limited Company has more reporting requirements so I recommend you hire an accountant. This will help you manage your returns, avoid penalties and calculate the most tax-efficient way for you to pay yourself. Generally, accountants do not recommend forming a Limited Company until your business profits reach £30,000. This is because there are no real tax savings to offset their fees under this threshold. If you plan to operate through a Limited Company, then you’ll need to register your Ltd before, or as soon as you begin trading. You’ll need to send out invoices, open a business bank account and take our insurance/permits in the name of your Ltd. In some cases, you might need to provide the Companies House registration number of your business to complete applications.
4. When to Register as Self-Employed
You are legally required to register as self-employed once the money you get paid (not your profit) goes over £1,000 during a tax year. Below this amount, you don’t have to let HMRC know about your business or pay any tax. This tax-free amount is known as the trading income allowance but it isn’t always a appropriate to use, so do your research before you claim it.
Regardless of whether you are making a profit or have to pay any tax, you’ll need to let HMRC know that you are self-employed by 5th October following the end of the tax year you started your business. A tax year runs from 6 April to 5 April. Therefore, if you started your business on 1 January 2022, then you would need to let HMRC know by 5 October 2022.
Despite this deadline, my advice is for you to register as self-employed and get a UTR number as soon as possible because they prefer to know sooner rather than later. This will also reduce the risk of receiving an automatic £100 penalty if you forget to do it.
5. Should You Open a Business Bank Account?
If you choose to register as self-employed, you are not legally required to open a business bank account. However, HMRC recommends it. It also makes running your business, budgeting and managing your taxes a lot easier!
Try Starling – it’s award-winning mobile banking for sole traders and Limited Companies and it’s also free for one month
6. Should You Get Insured? And How Do You Do That?
Being in business is not without financial risk and insurance offers you protection in the event something doesn’t go quite as you planned. Business insurance requirements vary from business to business but essentially, there are 7 main types:
- Professional indemnity
- Public liability
- Product liability
- Business equipment insurance
- Business interruption insurance
- Employers liability
- Business motor insurance
It’s a good idea to spend some time researching which ones suit your requirements. You can choose to go directly to an insurer. Or, to save time and hassle, you can try an online insurance broker like Simply Business. They help you decide which cover you need and send you quotes online from various insurance companies for you to choose from.
You may also want to consider taking out life insurance. In this instance, depending on the policy you choose and the amount you pay, it can offer you income protection in the event you are unable to work due to illness or worse. It’s a version of death in service that is only offered to people who are employed and is designed to protect people who work for themselves.
7. How Taxes Work When You Go Self-Employed
In contrast to when you are employed and receive a payslip, when you go self-employed you need to let HMRC about your income by filling in a tax return and pay any tax you owe on the earnings you declare. HMRC calls this self-assessment and means you need to file a tax return by 31 January each year, as well as paying any tax you owe by this date. You’ll also need to make an interim advance payment by 31 January and 31 July each year, known as a payment on account, towards your future tax bill.
You’ll be able to deduct expenses from your income which will reduce the amount of tax you have to pay. Before you get too excited, you can’t deduct all your expenses! There are certain ones which HMRC don’t let you subtract, even if you paid for them as part of your business. These are known as allowable and disallowable expenses.
You’ll also receive a deduction for your personal allowance (the amount you can earn tax-free). You’ll then pay tax according to how much money you have made after these deductions. The more you make, the more tax you’ll pay. Here are the 2022-23 income tax rates:
- 20% (basic rate) on profits between £12,570 to £50,270
- 40% (higher rate) on profits between £50,271 to £150,000
- 45% (additional rate) over £150,000
Side Hustler? Taxes work slightly differently when you’re employed and self-employed. Read this guide to find out how taxes work
Going self-employed means you’ll also pay National Insurance on your business profits. However, you won’t pay any if you earn up to the tax-free thresholds. Here are the National Insurance rates for the 2021/2022 tax year:
- Class 2 National Insurance £3.05 per week on profits over £6,515 per year
- Class 4 National Insurance. 9% on profits between £9,658 and £50,270 and 2% on profits thereafter
Despite not having to pay Class 2 National Insurance, some people choose to pay it voluntarily because it keeps their NI records up to date. It also protects their ability to claim state benefits like Maternity Allowance and the state pension.
8. Do You Need to Charge VAT When You’re Self-Employed?
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|
If your business’ taxable turnover exceeds £85,000 then you are legally required by HMRC to register for VAT. If that applies to you then once you get VAT 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 following the rules of making tax digital;
- Keep VAT receipts.
Being registered for VAT carries more administration and reporting to HMRC. That said, some businesses choose to voluntarily register for VAT because it brings tax and cash flow benefits, especially when combined with certain VAT schemes.
You cannot claim back VAT on your expenses unless you’re VAT registered because you won’t have access to the system that lets you get the money back. You can, however, claim for your expenses including VAT on your tax return so you get a little extra tax relief on the extra money you’re paying.
8. Tax Deadlines to Be Aware Of
There are automatic penalties for missing tax and filing deadlines. Depending on the ones you miss, there can be multiple types of penalties which increase as time goes by. It helps to put all your tax year dates in the diary so give yourself plenty of time to get your paperwork filed and taxes paid on time:
- 31 January 2022: 2020/2021 tax return deadline
- 5 April 2022: End of the 2021/2022 tax year
- 31 July 2022: 2nd Payment on Account for 2021/2022 due
- 5 October 2022: Deadline to register as self-employed with HMRC
- 31 October 2022: Deadline for filing paper tax return
- 30 December 2022: Deadline for tax return to pay tax through PAYE
- 31 January 2023: 2021/2022 tax return deadline
9. Invoicing Clients When You’re Self-Employed
Unless you sell a product or service where you take payment via a payment system like Stripe or Paypal, you’ll need to raise an invoice to get payment from your customer. Invoices are a legal document between you and your client/customer so it’s important you have all the right information on them to create a binding agreement to ensure payment.
There are certain pieces of information, such as your business name, VAT and company registration number, that you’ll need to include on your invoices by law. Getting your invoices ready as part of setting up your business will mean you’re ready to start billing your clients as soon as possible. Slow invoicing is one of the biggest contributors to cash flow problems for the self-employed, but it’s entirely avoidable.
I’ve put together invoice templates you can copy and keep for your business, or at least use to check you’re including the right information on your own version.
10. How to Tack Your Income & Expenses
When you go self-employed, you’ll need to declare your income and expenses on your tax return. Tracking the figures throughout the year is useful because it makes filling in your tax return easier if you plan to DIY it. It also helps you to keep an eye on how much tax you owe.
Depending on your preference, you can choose a spreadsheet or use software like Xero. Whichever one you choose, opening a business bank account will make bookkeeping much easier because you’ll have all your spending in one place. This means you can find the numbers you need without having to go through your personal transactions.
As part of your bookkeeping, you should also keep certain business records such as bank statements and receipts. You won’t need to send these to HMRC unless they investigate you by asking questions about your tax return.
11. Self-Employed Pensions
When you work for someone, they are responsible for deducting money every time they pay you so monies go into your pension, as well as making an extra contribution to top you up. It’s easy because you don’t have to think about making pension contributions. But when you go self-employed, it’s up to you to organise a pension. Self-employed pensions such as Pensionbee let you contribute different amounts into your pension scheme so you don’t have to commit to a fixed amount each month. This is very helpful for some who go self-employed and have an inconsistent income.
Regardless of employment status, all UK residents are entitled to the full new State Pension, if they have paid sufficient national insurance during their lifetime. For the tax year 2020/2021, the State Pension is £175.20 per week, paid monthly. That means you’ll get £9,110.40 per year from the age of 65. Although £9,000 a year isn’t really enough for anyone to live off when they stop working! You definitely need a plan in place to top up this money when you no longer have to work. To help with this, set up a private pension and start setting money aside to make sure you hit your retirement income goals.
Making the decision to go self-employed is a huge step for anyone, but hopefully, this beginner’s guide to going self-employed will help you ease your business in the right direction.