5 Things to Consider Before Becoming Self-Employed

The gig economy is on the rise*, meaning more and more people are choosing to become self-employed, whether for the flexibility or out of necessity as traditional job roles dwindle and morph. There are a few things you need to consider before becoming self-employed – the first is knowing the difference between being a sole trader and setting up a limited company.

A sole trader is essentially a self-employed person who is the sole owner of their business. It’s the simplest business structure available, whereas a limited company is a business structure that has its own legal identity, separate from its owners (shareholders) and its managers (directors). This is true even if it’s run by just one person, acting as shareholder and director.

Register as self-employed with HMRC 

Once you set up as a sole trader, you will be responsible for paying your own income tax and National Insurance (NICs), which means 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.

For example, “if you started working as a sole trader in January 2020, you must register as self-employed with HMRC by 5 October, 2020 at the very latest. That’s because January 2020 is in the 2019/20 tax year, so 5 October 2020 will be in your business’ second tax year (2020/21).” HMRC have a whole guide on working for yourself, which you can find here.*

  • Income tax

When working as self-employed you will be responsible for calculating how much tax you need to pay and will need to complete a Self Assessment Tax Return* every year. This will also include working out your expenses which are reasonable costs that can be claimed back*. Some individuals or small business owners employ an accountant to prepare accounts and to calculate the amount of tax they need to pay

  • National Insurance Contributions (NICs)

Once you are self-employed, you will 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 2020/21 tax year. If the profits from your self employed work is less than £6,475 in the 2020/21 tax year, you will not have to pay Class 2 NI contributions
  • Class 4 NICs: Self employed workers also need to pay Class 4 NICs. For the 2020/21 tax year, this is 9% on any annual profits you make between £9,501 and £50,000, and 2% on any profits above £50,000

Register for VAT

As of April 2018, 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.

Open a business bank account

It is very important to keep your business records and finances separate from your personal affairs, even though your business income will be taxed alongside your personal tax. Opening a separate business bank account can be a good way to do this, especially since small business current account fees aren’t usually too high.

Your new account will usually be “Your Name trading as, or T/A, your Business Name”. It can look more professional to have your business name on cheques and invoices.

Get the right insurance

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 your chosen industry.

If you employ someone else, even part-time, you are legally required to take out employers liability insurance. This will need to cover £5 million and your certificate of insurance needs to be displayed where employees can easily read it. Lack of compliance can result in heavy fines.

If your work includes providing professional services or advice to clients, you may also want to consider getting yourself insured for professional indemnity. This means that if a client sues you because they are unhappy with work you have done, or advice you have given, you are covered.

Keep accurate and up-to-date financial records

Keeping on top of your books is key for sole traders, as clear and accurate records of all your business transactions will make your life much easier – not only will it keep the tax authorities happy, but you’ll find it much easier to operate your business if you are organised and your paperwork is constantly updated.

When you submit your VAT return (if you’re VAT registered), you will need to pass your accounts information to your accountant and complete your annual self-assessment tax return. Clear records mean you’ll be able to do this quickly and efficiently.

Need advice about becoming self-employed? If you would like to speak with one of our financial planners, please don’t hesitate to get in touch over email at enquiries@gpfm.co.uk or call 01992500261. 

This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions. Investments can go down as well as up and you may get back less than you invested.  

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About gpfm  

gpfm are an independent financial planning company dedicated to the provision of personal, professional, and objective-driven advice for our clients. We have been awarded the Chartered Financial Planners title by the Chartered Insurance Institute for offering high quality, independent and informed advice that meets the needs of our clients.