The ease with which you can start up and run your own business is one of the main benefits of becoming self-employed.
You can even become a sole trader (another term for self-employed) while 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
When you set up as a sole trader (or work as a partner in a partnership if there’s more than one of you), you become responsible for paying your own income tax and National Insurance (NICs).
To start working as self-employed, you must register with HMRC, which you can do 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. For example, if you started working as a sole trader in January 2022, you must register as self-employed with HMRC by 5th October, 2022 at the very latest, since January 2022 falls in the 2021/22 tax year and 5th October 2022 will be in your business’ second tax year.
How you register your self-employed status with HMRC depends on your own particular circumstances, as 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, there is help available to establish whether you are employed or self-employed.
Income tax – Self- assessment tax return
When working as self-employed, you have the responsibility of calculating the amount of tax you need to pay and completing a Self Assessment Tax Return every year.
In practice, most small business owners will hire an accountant to prepare accounts and calculate the amount of tax to pay.
Find out more about self employed tax here:
- Sole Trader Tax – A Guide for start-ups and the newly self employed
- Going self-employed? Finance & tax points you’ll need to get right
- Our 2023/24 self employed tax calculator
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 have to pay Class 2 NICs on your income, which is £3.45 a week for the 2023/4 tax year.
If the profits from self-employment are below £6,725 (the small profits threshold), you do not have to pay Class 2 NI contributions at all.
Class 4 NICs
Self-employed workers also have to pay Class 4 NICs. For the 2023/24 tax year, this is 9% on any annual profits made between £12,570 and £50,270, and 2% on any profits above £50,270.
Check out our new 2023/24 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 2023, 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 it looks like you are going to hit the annual VAT threshold over the coming 12 months, you must also register. The threshold usually rises by a few thousand each year. Make sure to inform HMRC 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. Having a VAT number can give you more credibility, 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 in our VAT section.
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 – now offer completely free business accounts. If most of your banking requirements can be done online, these can be a particularly good option.
ANNA Money is good too – you can have an account (including sort code) set up in 10 minutes, which is remarkable.
These accounts 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.
You can typically set up your new account as “John Foster trading as, or T/A, your Business Name”. Once again, having your business name on cheques and invoices gives a more professional look.
If you expect to keep cash for some time, it is recommended to open a business deposit account, so you can earn interest on your money, even if the savings rates have yet to catch up with the recent base rate rises.
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4. Make sure you are properly insured
As a business owner, you must comply with legal (or contractual) requirements to have certain insurance policies in place.
The business insurance you need to buy will depend on the nature of your business and the industry you operate in. In addition to mandatory policies, you may also want to consider optional insurance coverages for added peace of mind.
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 need at least £5 million of cover (which is standard) 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 taking out a professional indemnity policy. It will cover you if a client sues you because they are unhappy with the 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.
Recommended insurance provider for the self-employed
Hundreds of ByteStart visitors have taken out Qdos self employed insurance over the past 15+ years. Public liability cover, for example, costs from just £4.58 per month!
5. Keep accurate and up-to-date financial records
To be a successful sole trader, you must keep on top of your books.
You are obliged to keep clear and accurate records of all your business transactions from the start. Keeping such records will ensure that you keep the tax authorities happy, and it will be much easier to operate your business if you are organised and keep your paperwork 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 it’s time to submit your VAT return (if you’re VAT registered), pass your account information to your accountant and complete your annual self-assessment tax return, you can do so quickly and efficiently – giving you more time to work on your new business.
Online accounting packages are now used by many small businesses to help 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.
We recommend you read our popular guide: self employed vs. limited company, which should help outline the fundamental differences between the two main ways of running a business in the UK.
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