5 things you must do when you go self-employed

The beauty of being self-employed is how quickly you can get set up and in business.

Even if you are currently employed by someone else, you can also become a sole trader to run your own business in your spare time. This makes it a safe way to test a business idea and see if you like being your own boss.

There are five essential things you must do when you first start working for yourself.

Register as self-employed

As a self-employed person it is your responsibility to pay your own tax and National Insurance contributions on your earnings. Her Majesty’s Revenue and Customs (HMRC) requires that you register as self-employed within three months of starting up. You have to do this even if you already fill in an annual tax return - otherwise you may be fined £100.

Registering is easy. There is a form online or you can call HMRC on 0845 9000 444.

You must also start paying what are known as Class 2 National Insurance contributions. These are set at a flat rate (currently £2.20 a week) if you earn more than £4,635 a year. You just set up a simple Direct Debit.

If you earn less than £4,635 a year, you don’t have to pay these contributions. Just apply for a certificate of small earnings exception (PDF). Some people continue to pay contributions to keep their entitlement to a state pension and other benefits up-to-date.

If you make a yearly profit of more than £5,225 you will also have to pay Class 4 National Insurance contributions, at 8 per cent of profits. You’ll work out how much to pay on your tax return.

If you’re just starting out and aren’t sure whether or not to register, it’s pretty simple to work out whether you are employed or self-employed.

Register for VAT

If you expect your business to turn over more than £67,000 (from 1/4/2008 - previously it was £64,000) in a 12 month period, you will also need to register for VAT. It’s a rolling 12 months, so you need to be constantly looking backwards over the last year of trading to check you are not over the threshold.

Once you hit the threshold you must tell HMRC within 30 days. You may be fined if you don’t.

Some businesses choose to register early, known as voluntary registration. This can bring huge benefits. Collecting VAT can help your marketing and give your business more credibility. You’ll also be able to claim back VAT on relevant purchases you make.

But on the downside, you will have to keep detailed records and submit a quarterly VAT return to strict deadlines.

Registering for VAT can be done online or by filling out this form.

Get a bank account

Even though you are a sole trader working for yourself, it’s vital to keep your business’s financial affairs separate from your personal affairs.

So open a business bank account. You can do this with your existing personal bank, or pick another bank that has a business account offering. Your new account should reflect the name of the business, for example cheques should say “your name trading as Business Name”. This will ensure you come across professionally.

It makes sense to shop around before signing up for a new account. Compare charges between different accounts, online tools, and how easy it is to speak to a human, not just an automated call centre.

Our partner Alliance & Leicester currently has a deal for two years free banking.

Don’t forget to get a deposit account as well if you think you will have amounts of money sat around that could earn interest.

Keep accurate records

One of the keys to running a successful business as a self-employed person is keeping on top of the paperwork.

From day one keep clear and accurate records of everything that happens to your business, especially financial transactions. Try to be as organised as possible and put time aside each week to keep paperwork up-to-date.

You will appreciate this when it’s time to fill out your tax or VAT return. There’s nothing more demotivating than having a large box with months worth of paperwork to dredge through. Whereas filed organised paperwork will make it a quick and easy process. You will also find it easier to make sensible decisions and perform accurate business planning as key information will be at your fingertips.

Get insurance

Smart business people reduce the risk factors that could damage their business. One of the easiest ways to do this is with relevant small business insurance.

Even as a self-employed person working on your own you should look at professional indemnity and public liability insurance.

There are of course compulsory insurances you must get, such as employers liability when you first take on staff.

You can compare small business insurance quotes at Simply Business, and get a quote from our partner Hiscox Insurance.