Becoming self employed is actually a very simple process. The only essential actions you need to take are to do with making sure you are registered for paying income tax and national insurance. However, there are a few other key things that you should also consider as you make the exciting move into self employment.
If you are planning to start a business, a common question is ‘at what point do you officially become self employed?’ The key point to be aware of here is that you need to register as self employed as soon as you begin looking for work. It does not matter whether you are successful in getting work or not, but you should be self employed from as soon as you begin to seek work for yourself.
For the purposes of this post I am going to assume that you will be working as a sole trader rather than a limited company or partnership. If you set up a limited company, you are technically an employee of that company, rather than self employed, so do not need to register.
1. Register For Income Tax
To officially become a self employed person in the UK you just need to register with HMRC and fill in a tax return every year. On the HMRC website you have the option to register for several types of business tax at the same time, including VAT and corporation tax. If you will be employing other people you can register as an employer for PAYE (pay as you earn) too. Most people starting out as self employed will only need to register for self assessment to pay income tax.
You still need to register as a business even if you already file a personal tax return every year. You can find the link to relevant page on the HMRC website.
2. Arrange To Pay National Insurance
As soon as you are self employed you will need to start paying class 2 National Insurance contributions. The easiest way to pay is to set up a direct debit. If you do this the amount due in 2013/14 is £142.45 for the year, divided into twelve monthly payments.
You may be exempt from class 2 national insurance if your earnings are below a certain level. In 2013/14 if you are likely to earn less than £5,725 you may not need to pay class 2 NI. You will need to apply for exemption in advance.
Class 4 national insurance is a completely separate tax and this is paid in relation to any profit you make. This will be payable after your financial year has ended, as with income tax. It is very important to put money away regularly to cover the tax and class 4 national insurance that will be due after you have done your tax return.
3. Choose The Right Name For Your Business
It is worth giving plenty of thought to the name under which you will trade. It could just be your own name, which is nice and easy, but if you plan to trade under a business name, there are a few things you need to consider.
First of all, make sure that the name you are planning on using is not already registered or trademarked by someone else. You can do this quickly online. Your business name also needs to send the right message to potential customers, so should convey something about what it is you are going to be offering.
Do not settle on a name without first checking and registering the appropriate domain names.
4. Get Your Basic Record Keeping In Order
You can save yourself time and money by setting up some basic systems at the outset, which will allow you to keep orderly records of your income and expenditure. In particular you need to keep receipts and any invoices you have paid for any business expenses. This is important because these costs will be set against any income you make to reduce how much profit you declare and therefore how much tax you pay. It will also save you money when you pay your accountant to do your end of year accounts. Their time is money, so you don’t want to pay them to sort out shambolic record keeping.
5. Make Arrangements For Where You Will Work
Working from home is the easiest and cheapest option, so is highly recommended as the best way to begin. For some businesses, of course, this is not possible, so you must arrange a suitable place of work. Be sure to keep costs as low as possible when you are just starting out in business. You can always expand as your business grows.
6. Have Insurance In Place
If you employ any staff you are legally obliged to have employers’ liability insurance for at least £5million. If you are working on your own, you may still need some insurance to protect your business against damaging claims. The most obvious ones to consider are public liability cover and professional indemnity protection.
7. Have A Business Plan
By rights this point should come before all of the others, because you really ought to have a good business plan in place well before you actually become self employed and begin trading. This should be the blueprint that outlines all the important elements of how your business will work. There is a full guide on how to write a business plan in the Resources section of this website.