So you’re ready to go it alone and become self-employed!
You know what you want to do, but now you’re wondering how to set up a business, when to register with HMRC and how to get paid by your customers. Not to mention all things tax-related!
Well, you’re in the right place, whether numbers are your thing or not.
I put this guide to becoming self-employed together to answer all common questions I’ve been asked in my past life as an accountant and still see regularly online. I’ll also show you where you can find more information to start taking your knowledge of business finances to the next step!
There’s no jargon, I promise! But there is quite a lot of information, so you may want to bookmark this page so you can come back to it as you work through each stage of setting up and registering your business.
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.
Create a Start-Up Budget
If you aren’t planning to put together a full on business plan, then creating a start-up budget is a must-do.
A start-up budget is financial plan for getting your business off the ground and ensure there is enough cash to pay bills, including yourself, until it starts running at full capacity.
You need to include all the costs it takes to get set up in business, putting aside a contingency for the unexpected and plan how you’ll cover overheads until you can find enough work to cover all your costs consistently.
You’ll also give yourself peace of mind that:
- Your business idea is viable
- How much money you need to start your business
- How much you need to sell (sales target)
- What you’ll earn per hour
I’ve created a Step-by-Step Guide to Calculating Start-Up Costs and a free template you can use to create your start-up budget. In this guide I walk you through an example that you can follow to set yours up correctly.
Choose Your Business Structure
The most common types of UK business structures are:
- Self-employed (or sole trader)
- Private Limited Company
- Limited Liability Partnership
The quickest way to get started is to register as self-employed but, depending on your earnings and if you have a business partner, forming a Limited Company can save you tax, offer you certain legal protection as well as formalise ownership between you and your business partner(s).
Owning a Limited Company has more reporting requirements, so I recommend you use an accountant to 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 because below this threshold there are no real tax savings to offset their fees.
Register Your Business
When you register your business depends on which legal structure you choose. Here’s how to do that and the registration deadlines for most popular business structures:
When to Register as Self-Employed
You are legally required to register as self-employed 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 main benefit of tax losses is that you can use them against profits you make in future tax years.
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 2020 then you would need to let HMRC know by 5 October 2020.
Despite this deadline, I would advise you to register with HMRC as soon as possible because they prefer to know sooner rather than later and you reduce the risk of receiving an automatic £100 fine if you forget to do it.
When to Register a Limited Company
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. And in some cases, you’ll need to provide the Companies House registration number of your business to complete applications.
So don’t delay in forming your Limited Company.
Open a Business Bank Account
If you are self-employed, then opening a business bank account is not a legal requirement. If you have a Limited Company then you must open a separate business bank account.
Even though it is not a legal requirement for the self-employed, HMRC does recommend it. And I also recommend it because it makes your bookkeeping and administration much easier. It’ll also make your accountants’ life easier and probably help reduce their fees if you choose to use one. You can take a look at Starling.
Apply for Insurance, Permits and Licences
Requirements for insurance, permits and licences vary business to business. For example, a self-employed bookkeeper will need professional indemnity insurance and professional licences to trade, but a self-employed cake maker will need a food hygiene certificate and public liability.
So you’ll need to research what you need, find out the application process and any costs, depending on what your business does. There are 7 main types of insurance:
- Professional indemnity
- Public liability
- Product liability
- Business equipment insurance
- Business interruption insurance
- Employers liability
- Business motor insurance
Understand Tax and VAT
Going self-employed means it’s all down to you to work out what types of taxes you need to pay, how much you need to pay and if you have to register for VAT (unless you take advice from an accountant).
The types of taxes you need to pay depend on your business structure and how much you earn.
Taxes if You Register as Self-Employed
Unlike when you are employed, when you become self-employed 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.
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.
|Personal allowance 0%||£12,500||£12,500|
|Basic rate 20%||£12,501 to £50,000||£12,501 to £50,000|
|Higher rate 40%||£50,001 and £150,000||£50,001 and £150,000|
|Additional rate 45%||over £150,000||over £150,000|
As a self-employed business owner you’ll also need to pay Class 2 and Class 4 national insurance. Again the amount you pay is based on your business profits.
|Class 2 National Insurance||£3.05 per week on profits over £6,475 per year|
|Class 4 National Insurance||9% on profits between £9,501 and £50,000
2% on profits over £50,000
Once a year, by the 31st January, you’ll need to declare your earnings to HMRC by filing in a 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 starting at £100 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.
Taxes for a Limited Company
If you choose to form a Limited Company for your business then you’ll pay corporation tax at 19% on the first £300,000 of business profits.
Then, depending on how you pay yourself, there will be additional taxes to pay on your income. Typically Limited Company directors pay themselves through a tax efficient combination of PAYE salary and dividends.
- PAYE salary will attract income tax and national insurance;
- Dividends which attracts dividend tax.
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|
If you business’ taxable turnover exceeds £85,000 then you 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.
Note Down Tax Deadlines
There are automatic penalties for missing tax and filing deadlines. And depending on the ones you miss there can be multiple types of penalties, which increase as time goes by.
It’ll help to put all your deadlines in the diary so you give yourself plenty of time to get your paperwork filed and taxes paid on time.
If you have a Limited Company, then it is most likely you’ll need to meet the above deadlines as a Company Director, as well as:
- Filing company accounts 9 months after year-end
- Filing a corporation tax return 12 months after year-end
- Paying corporation tax 9 months after year-end.
Learn What To Include on Invoices
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 that gets you paid.
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 set up as part of your business registration, will mean you’re ready to start billing your clients as soon as you can. Slow invoicing is one of the biggest contributors to cash flow problems for the self-employed, but it is entirely avoidable.
I’ve put together templates you can copy and keep for your business, the one you’ll need depends on whether you are registering as self-employed or have a Limited Company.
Setup Bookkeeping Processes
In my past life 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.
If you are just starting out it’s totally understandable that you may not be sure what you need to keep or even what bookkeeping is.
The two best tips I can give you to make your bookkeeping quick and easy are:
- Open a separate business bank account
- Set up a bookkeeping system, if you are just starting out then a simple spreadsheet will do.
Set Up a Pension Plan
When you work for someone they are responsible for deducting money every time they pay you to put 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.
Regardless of employment status, all UK residents are entitled to the full new State Pension, as long as 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.
£9,000 a year isn’t really enough for anyone to live off when they stop working! And the age you can claim this is set to rise. That means you need a plan in place to top this money up.
If you are self-employed then you need to open up a private pension scheme and make your own contributions.
A private pension is a special type of savings account that grows at a better rate than a standard savings account that you can access from the age of 55. HMRC also offers special tax-breaks when you pay in and withdraw your money.
You’ll need make sure you pay enough into your pension scheme while you are working, to have enough when you plan to stop working.
So make sure you keep up with your contributions once you go self-employed.