Firstly, you need to pat yourself on the back. You are about to embark on one of the most exciting journeys of your life along with 5 million other self employed people in the UK (Oct-Dec 2019 – ONS.GOV.UK).
Becoming self employed is often the first step into entrepreneurship and 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 as an employee for someone else, so you can test the water and see whether working for yourself suits you, we often call this a “side hustle”.
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:
Registering as self employed with HMRC & paying taxes Once you set up as a sole trader 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. The tax year runs from the 6th April to the 5th April the next year. So, if you begin being self employed today, you have until 5 October 2021 to register, but we would suggest doing this sooner rather than later. 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. National Insurance Contributions (NICs) for self employed Once you start operating as self employed, you will also need to pay Class 2 National insurance contributions you need to have profits over £6,365 for 6th April 2019 to 5th April 2020 and you will pay £3 per week. If the profits from your self employed work is less than £6,365 in the 2019/20 tax year, you will not have to pay Class 2 NI contributions. The thresholds for 2020-21 tax year is £6,475 profits before you will pay national insurance which is then £3.05 per week. Class 4 NICs Self employed workers also need to pay Class 4 NICs if their profits are high enough. For the 2019/20 tax year, this is 9% on any annual profits you make between £8,632 and £50,000, and 2% on any profits above £50,000. All tax and national insurance needs to be paid by 31 January after the end of the tax year, so if you were self-employed in 2019-20, you will need to submit and pay any tax or national insurance due by 31 January 2021.
Make sure you are properly insured When you are in business, you must be properly insured, it's the law. The insurance cover you need to take out depends on the type of business you are and the industry you’re working in. If you provide any type of professional service or advice to clients, you should consider getting professional indemnity insurance. It will cover you if a client sues you because they are unhappy with the work you have done. If you employ another person, even if it is only an occasionally you will have to have employers liability insurance and you must display your certificate of insurance where employees can easily read it and you could expect a large fine for failing to have a policy in place. Most small businesses take out public liability insurance especially if customers visit you at your place of business or if you do work on their property. It will protect you if a third party injures themselves, or damage is caused to property caused by business activities. Talking to other people in your industry or looking on Facebook support groups for your industry should be able to recommend insurers.
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. Some challenger banks are also now offering business accounts. If most of your banking requirements can be done online, these can be a particularly good option. For example, GetCoconut or Starling Bank are becoming very popular. If you’re likely to hold cash for some time or you want to put some money aside for taxes, you should also open a business deposit account to get a little interest on your money.
Work out whether you need to register for VAT? As of April 2020, if your business has an annual turnover of £85,000 or more for the previous rolling 12 month period, you need to 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. 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. Often, this depends on the customers you have and if they are also VAT registered. Sometimes, 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 looking into the VAT flat rate scheme which can make 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.
Keep accurate and up-to-date financial records To be a successful sole trader, you must keep on top of your books and your cashflow. From the start, you should keep clear and accurate records of all your business transactions, which if you get everything into place quickly, 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. We recommend either Xero or Quickbooks online and can offer training to help you run your business efficiently. If you would like to talk with an accountant about becoming a sole trader, our “Sole trader Surgery Sessions” can be a way to get your questions answered drop us an email to book.
Email us at Active@ActiveLedgers.co.uk to ask any questions you might have.