How to become self-employed
Self-employment: what do you need to know? Get equipped with the Startups guide to going self-employed…
With the economy seeing signs of recovery and various business sectors enjoying a vogue in the UK, now is as good a time as ever to become self-employed.
Data from the Office of National Statistics (ONS) showed that in the three months to the end of November 2013, 92,000 people decided to go it alone – compared with just 30,000 in the previous three months.
More and more people are deciding to become their own boss and register as self-employed, but before you join them, there are some hoops to jump through – read the advice below and follow the links for helpful guides and more information.
When do you become self-employed?
If you make all or part of your living by working for yourself – in other words, not receiving a salary or commission from an employer – you meet the self-employed definition. Contrary to what some people believe, this also applies to anyone selling goods on eBay or other e-trading sites for profit, regardless of turnover.
There are three different types of business ownership models in the UK; sole trading, partnership and limited company. If you have complete control over your venture and the way it is run, you are considered a sole trader by the HMRC.
The law makes no distinction between the business and a sole trader, so you should be aware that any liability and debt incurred by your venture would pass on to you if the business failed. In addition, sole trader businesses usually cease on the owner’s retirement or death.
There are certain legal requirements before you can open for business as a sole trader. If you will trade under a name different to your own personal name, you must display your name as owner and an address where documents can be served on all stationery.
When naming your business you should be aware of the legal restrictions governing certain names. Words like ‘International’, ‘Federation’ and ‘Registered’ are examples of restricted words under the Company and Business Names Regulations 2005.
You should also check Companies House and directories such as the National Business register to ensure your business’ name is not the same or confusingly similar to that of another business; for a more in-depth look at the legal requirements of naming a business, click here.
When do you need to register as self-employed?
You must register as self-employed within three months of setting up as a sole trader (starting from the last day of your first month of trading) or potentially face a penalty from the HMRC based on unpaid Class 2 National Insurance contributions.
Registering as self-employed for the first time can seem a daunting process, so follow Startups’ step-by-step guide to registering as a sole trader to ensure you tick all the right boxes.
Bear in mind that some businesses, such as taxi and car hire ventures, require you to obtain additional licenses before you start trading, which can normally be obtained from your local authority.
There are also several Acts of Parliament you should be aware of before starting a business. The Sale of Goods Act and corresponding Supply of Goods and Services Act are the two most important pieces of legislation you should be aware of as a sole trader, as they govern how you market, sell and deal with your products and services.
Other key Acts include the Trade Descriptions Act, Data Protection Act and Price Marking Order acts; read a summary of the legal requirements imposed by each here.
Self-employed tax: Self-assessment National Insurance and self-assessment considerations
For many people setting up as a sole trader, this will be the first time they deal with tax issues themselves, and it can seem a confusing process at first. HMRC will pay just as much attention to you as a larger company, so don’t try and slip under the radar. As a self-employed person you will pay income tax on earnings calculated after business expenses and personal allowances have been deducted, which is payable twice a year. Visit the HMRC website for more information on self-assessment rates and to download a registration form.
It doesn’t stop at income tax, though. As a sole trader you will need to pay both class 2 and class 4 National Insurance contributions – class 2 contributions are at a flat rate of £2 per week whilst class 4 payments are calculated as part of any profit, up to a maximum of £1,775.55.
If your earnings exceed £85,000 per annum, you will also need to pay VAT on your earnings. Sole traders will need to complete and return the VAT 1 form to HMRC, which is available online. You need to keep hold of business records such as bank statements.
After you’ve put the groundwork in place, there are a number of steps you can take to consolidate and further grow your self-employed venture.
Although it is perfectly possible to have the same account for your business and personal finances, you will need to distinguish your personal spending from that of your business for tax purposes, so it may well be a good idea to open a separate business bank account.
Unless you are comfortable with the idea of the unexpected putting your business under for good, you should look into insuring your sole trader business.
There are a number of health and medical insurance providers that offer special insurance tailored to small business, so shop around thoroughly to find the deal that best suits your business.
Consider taking out disability insurance to cover you for time off through illness or injury, but check qualifying periods carefully – some cheaper policies will not pay out after a three-month excess period.
It’s also a good idea to make arrangements for your pension as soon as possible; as a sole trader, nobody is responsible for this but you, and you shouldn’t rely on the state pension if you want a comfortable retirement.
If your venture becomes successful and you are looking to expand, you could consider forming a limited company. This separates your business and personal liability and protects you in the event of failure, but subjects your business to a number of restrictive requirements.