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 (another term for self-employed) 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:
Register as self employed with HMRC
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. You can register online or call HMRC on 0845 915 4515 if you’d prefer to speak to someone.
If you are unsure whether or not you need to register with HMRC, here is some help to establish whether you are employed or self employed.
Once you start operating as self employed, you will need to pay National Insurance contributions (NICs).
When you are self employed you need to pay Class 2 NICs on your income – which is £2.70 a week for the 2013/14 tax year. You will also need to pay Class 4 NICs at 9% on any annual profits you make between £7,755 and £41,450, and 2% on any profits above £41,450.
If you make profits of less than £5,725 a year (2013/14 tax year), you will not have to pay these NI contributions.
Do you need to register for VAT?
As of April 2013, if your business has an annual turnover of £79,000 or more, you must register for VAT.
At any stage of the business cycle, if you look like you’re going to hit this annual VAT 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 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.
Get 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 from your personal affairs.
For this reason, we recommend you open a separate 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, you should also open a business deposit account to get a little interest on your money, even if rates are still at historic lows.
Keep accurate and up-to-date financial records
To be a successful sole trader, you must keep on top of your books.
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 submit your VAT return (if you’re VAT registered), pass your accounts information to your accountant and complete your annual self-assessment tax return, you’ll be able to get these done quickly and efficiently – giving you more time to work on your new business.
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 close family relatives, you are legally required to take out employers liability insurance. You will need cover of at least £5 million and you must display your certificate of insurance where employees can easily read it. You can expect a very heavy fine for failing to have a policy in place.
Most small businesses take out public liability insurance, especially if customers visit you on your premises or if you do work on theirs. It will protect you if a third party injures themselves, or damage is caused to property because of your business activities.
If you provide any type of professional service or advice to clients, you should also consider getting yourself insured for professional indemnity. It will cover you if a client sues you because they are unhappy with work you have done or advice you have given.