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How to be Self-Employed: A Guide

Starting your own business is one of the most exciting career moves you can make. More and more entrepreneurs are making the leap, with the number of self-employed people growing from 3.8 million in 2008 to 4.8 million in 2017.

Whether you want to learn more about turning your existing skills into a business or you have started down that route already, our guide will provide you with everything you need to know about self-employment success.

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What are the advantages of being self-employed?

  • Be your own boss - You make the decisions and don’t see your hard work going into someone else’s pocket!

  • Choose your clients - You have the final say on who you want to work with.

  • Build something - Few achievements are as rewarding as watching your business grow.

  • Work remotely - Perhaps you dream of working from a Bali beach café or spending more time with the kids? Self-employment can give you the freedom to work from anywhere.

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What is self-employed?

According to the UK government "a person is self-employed if they run their business for themselves and take responsibility for its success or failure.”

Self-employment is a broad term, and it’s worth bearing in mind that it’s possible to be both self-employed and employed by someone else at the same time. Plenty of people spend most of their time working for one company, but still qualify as independent contractors because of a business they run in the evenings.

If you’re uncertain whether your current status counts as ‘self-employed’, the HMRC offers both phone and web-based checks.

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How can I become self-employed?

If you wish to become self-employed, you need to:

  1. Register with the HMRC as a self-employed professional

  2. Write and finalise a business plan

  3. Research your market: can you depend on a regular income?

  4. Get your finances in order, set up a business bank account and apply for any loans you might need

  5. Make sure you have the right insurance for your business 

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How to register as self-employed

Registering as self-employed is reasonably straightforward, but before you announce your plans to the taxman, there are a few different business structures to consider:

  1. Register as a sole trader - This is the simplest option, but it means you are responsible for all your business’s debts.

  2. Register a limited company - It is more complicated to set up a limited company, but it ensures your personal finances are kept separate. In a nutshell, this means you won’t personally face financial ruin if your company goes bankrupt.

  3. Register a partnership - If you choose to work with one or more people, you are all responsible for the company’s debts.

Once you’ve decided on a structure that works best for you, visit GOV.UK to register your business.  

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Self-employed insurance

Getting your business insured is a very sensible move, and for some, it is a legal requirement – if you’re a driving instructor, or employing other people, for instance. Here’s a quick rundown of cover that’s typically included in a self-employment insurance policy:

Professional indemnity cover: This will protect against any claims made against you – including any legal costs incurred – should you be accused of professional negligence.

Public liability cover: This will protect you in the event of any claims made regarding accidental injury or damage to a client or a member of the public. It also covers loss or damage to public property, as well as any legal costs incurred.

Employers’ liability cover: If you employ one or more people, this type of cover is compulsory. It’ll ensure you have the funds to compensate an employee who gets injured on the job.

Home insurance: If you are planning to work from home, you should check with your current home insurance provider if this affects the cover or premium. You may wish to consider purchasing a home insurance policy that provides cover for your business equipment, theft and personal liability.

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Self-employment tax

Self-employed people don’t pay tax through PAYE. Instead, you pay through annual self-assessment. The deadline for declaring your self-assessment is 31 January every year – then it's up to the taxman to calculate what you owe.

How much tax do I pay as self-employed?

The tax bands for self-employed people based on HMRC figures for the 2019-20 financial year, based on annual turnover, are as follows:

  • Up to £12,500: 0%

  • £12,501 to £50,000: 20%

  • £50,001 to £150,000: 40% (on anything earned over £50,000)

  • Over £150,000: 45%

It’s essential that you keep a record of all your invoices and other business documents in case HMRC asks for further evidence. You’ll also want to keep the receipts for anything you spend on the business, as these can reduce your tax bill.

Self-employed expenses: what can I claim?

There are many expenses you might be able to claim to minimise the tax that you owe. Bear in mind that your exact allowances will depend on the type of business you run, but, generally, these include:

  • Equipment costs, including anything from stationery and uniforms to plant and machinery

  • Travel costs, such as fuel, parking and train tickets

  • Business premises costs or the cost of using your home as an office

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Financial help for self-employed people

Budgeting for your first few steps into self-employment will provide a sensible safety net. As the work mounts up, don’t be disheartened if balancing the books gets trickier. There’s a wealth of information online to keep you and your business running full steam ahead.

  • HMRC - Find articles, guides and videos to understand your self-employed tax returns, allowances, and tax codes.

  • TaxAid - Get assistance if you have a tax problem the HMRC can’t solve.

  • Money Advice Service - A government-backed service that provides free and impartial guidance on all money matters.

What to look for in a business bank account

It's always good to shop around for a business bank account that’s going to deliver the best return on your hard work. When choosing the right account for you, keep an eye out for features like:

  • Free transactions

  • Free overdraft facility

  • No charges (at least in the initial period)

  • Introductory offers (provided their service levels and costs remain competitive at the end of the introductory period)

Do I need an accountant if I'm self-employed?

Again, this one’s totally up to you. Whether you want to draft in extra help with the numbers will often depend on the costs and complexity of your business – not to mention how much time you actually want to spend working!

Remember you don’t need to hire on a permanent basis, either; many self-employed professionals just opt for advice with certain decisions, or at the end of the tax year, for example.

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About the author

Alison Wild Bcom Hons MAAT MATT Taxation Technician Commercial Tax Pensions Insurance And Marketing Specialist AuthorAlison Wild BCom (Hons), MAAT, MATT, Taxation Technician is a highly respected industry professional who has been working with and advising SMEs in areas including tax, pensions, insurance and marketing for over 25 years. She is a member of the Association of Accounting Technicians (AAT) and Association of Tax Technicians (ATT) and also has over 20 years' experience as a residential landlord.