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 for someone else, so you can test the water and see whether working for yourself suits you.
To help you understand some of the most important issues, you’ll need to tackle, here are 5 things you need to do when you decide to go self employed.
1. Registering as self employed with HMRC & paying taxes
Once you set up as a sole trader (or work as a partner in a partnership if there’s more than one of you), you will be responsible for paying your own income tax and National Insurance (NICs).
If you start working as self-employed, you must register with HMRC. You can do this at any time up to 5 October of your business’ second tax year.
A tax year runs from 6 April to 5 April of the following year. So, for example, if you started working as a sole trader in January 2021, you must register as self-employed with HMRC by 5th October, 2021 at the very latest. That’s because January 2021 is in the 2020/21 tax year, so 5th October 2021 will be in your business’ second tax year.
How you register your self employed status with HMRC depends on your own particular circumstances. These are explained fully in our guide on How to register as self employed.
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.
Income tax – Self- assessment tax return
When working as self employed you will be responsible for calculating how much tax you need to pay and complete a Self Assessment Tax Return every year.
In practice, most small business owners will employ an accountant to prepare accounts and to calculate the amount of tax you need to pay.
You can find more details on tax for self employed people in;
National Insurance Contributions (NICs) for self employed
Once you start operating as self employed, you will also need to pay your own National Insurance contributions (NICs).
Class 2 NICs
As a sole trader you need to pay Class 2 NICs on your income – which is £3.05 a week for the 2021/2 tax year.
If the profits from self employment are below £6,515 (the small profits threshold), you will not have to pay Class 2 NI contributions at all.
Class 4 NICs
Self employed workers also need to pay Class 4 NICs. For the 2021/22 tax year, this is 9% on any annual profits you make between £9,568 and £50,270 and 2% on any profits above £50,270.
In the Spring 2017 Budget, the Government announced that Class 4 NICs would be increased to 10% and then 11%. However, within days the proposed increases in Class 4 NICs were scrapped.
Check out our new 2021/22 Sole Trader Tax Calculator.
For the latest NIC rates for sole traders, check the GOV.UK site here.
2. Work out whether you need to register for VAT
As of April 2021, if your business has an annual turnover of £85,000 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 coming 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.
You’ll find more useful information on VAT in;
3. Open 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. Small business current account fees aren’t much – usually £6-£10/month – plus some transaction fees.
If you prefer to bank with a big name bank, most of the high street banks offer 12-18 months’ free business banking for new businesses.
Some challenger banks – such as Tide and Cashplus – are also now offering business accounts. If most of your banking requirements can be done online, these can be a particularly good option.
They are also suitable if you have a less than perfect credit history, and if you are in a hurry to open your account as you can open an account quickly online.
Typically, your new account will be “John Foster 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.
For more details, try our comprehensive guide to setting up a sole trader bank account.
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4. Make sure you are properly insured
When you are in business, you are required by law to have certain insurance policies in place.
The insurance cover you need to take out depends on the type of business you are, and the industry you’re working in.
You might also want to have the reassurance that some other optional insurance cover gives you.
If you employ another person, even if it is only an occasional part-timer, 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 their property. 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.
ByteStart’s complete guide to sole trader insurance will give you more help to work out what other insurance policies you might want to consider.
5. 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.
Our Beginner’s guide to setting up accounts for a sole trader will help you to get to grips with your accounts.
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.
Many small businesses now use online accounting packages that help to simplify financial record keeping. Our guide on How to choose the best online accounting system for your business explains more about how these work and your options.
Going self employed or setting up a limited company, which is best?
If you are thinking of going into business, working out whether to go self employed or to set up a limited company is one of the first big decisions you have to make.
It can be a bit daunting but ByteStart has lots of further reading to help you understand the differences and come to the right decision.