One of the main benefits of becoming self employed is the ease with which you can start up and run your new business.
You can even become a sole trader whilst working as an employee for someone else, so you can test the water and see if you’re suited to working for yourself.
Here are 5 things you need to do when you decide to go self employed:
How to register as self employed
Once you become a sole trader (or work as a partnership if there’s more than one of you), you will be responsible for paying your own income tax and National Insurance (NICs).
You must register as self-employed with HMRC within three months of starting trading, even if you already pay tax via the self assessment process each year.
It is easy to register – you can register online or call HMRC on 0845 915 4515 if you’d prefer to speak to someone.
Once you start operating as self employed, you will need to pay Class 2 NICs on your income – currently £2.50 a week (2011/12 tax year). You will pay extra Class 4 NICs on profits you make over £7,225 (2011/12 tax year).
If you earn less than £5,225 p.a. (2011/12 tax year), you will not have to pay these contributions
At this stage, if you’re still unsure whether or not you need to register, here is some help to establish whether you are employed or self-employed.
Do you need to register for VAT?
If your business is expected to turnover £73,000 (from 1st April 2011) or more over the next 12 months, you must register for VAT. At any stage of the business cycle, if you look like you’re going to hit this threshold over the next 12 months, you must also register. The threshold usually rises by a few thousand each year. Make sure you let HMRC know within 30 days, or risk paying a fine.
In many cases, you might decide to register for VAT even if you don’t need to. You may gain more credibility by having a VAT number, and you’ll be able to claim the VAT back on eligible purchases you make. You might also consider the the flat rate VAT scheme, which makes accounting for VAT much simpler. Your accountant will be able to advise you if you’d be better off on the Flat Rate or standard VAT scheme.
Getting a business bank account
As a sole trader, although your business income will be taxed alongside your personal tax, it is vital to keep your business records and finances separate.
For this reason, we recommend opening a business bank account. Shop around, as you can always find up to 24 months free banking deals with the High Street banks. Typically, your new account will be “John Bloggs trading as (or T/A) your Business Name”. Once again, it looks more professional to have your business name on cheques and invoices.
If you’re likely to hold cash for some time, a deposit account may be a good thing to open, even if rates are still at historic lows.
Maintaining accurate records
To be a successful sole proprietor or partnership, you must keep on top of the paperwork.
From the start, you are obliged to keep clear and accurate records of all your business transactions. Not only will this ensure that you keep the tax authorities happy, but you’ll find it so much easier to operate your business if you are organised and your paperwork is constantly updated.
When the time comes to fill in your quarterly VAT return (if you’re registered), and your annual self-assessment form, you’ll be able to complete your paperwork with relative ease.
Insure your new business
You are required to take out some insurance policies by law, depending on the industry you’re in, and other cover is optional. If you employ another person, aside from certain exceptions, you are legally obliged to take out employers liability cover.
Most small businesses take out public liability insurance, especially if customers visit you on your premises (or if you do work on theirs).
If you provide professional advice to clients, you should also consider professional indemnity.
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