5 things you need to know about self employment
Last Modified 16th of February 2021
Self employment has some distinct advantages – almost everybody at some point during their employed life has thought about the advantages of being your own boss and reaping the rewards for your hard work. Many then dismiss the idea as financially unstable and difficult – but in reality it can be one of the best decisions of your life.
Anybody can become self employed, even if you intend to continue your employment with someone else devoting only your spare time to your own business.
There are 5 key things that you need to do to become self employed and then you can get on building your busines
Register with HMRC
Before you get started you must let HMRC know of your intention to become self employed. When you are employed your employer automatically deducts National Insurance (NI) and Pay As You Earn (PAYE) from your wages and pays this tax directly to HMRC. When you become self employed (even if alongside your main employed job) you are now liable to make these tax payments yourself.
You must register within 3 months of starting your business, regardless of whether you already complete a self assessment each year, or you may be liable to pay a fine.
Once registered you will have to make Class 2 NI contributions on your income if you earn over £6025 per year. If your profit for the year exceeds £8164 you will also be liable to pay Class 4 NI contributions. Each year you will be required to complete a self assessment stating your earnings for the year.
Register for VAT
If your business is expected to have a turnover (total sales) of over £70,000 over a 12 month period then you are required to register for the VAT scheme with HMRC. You should calculate your total sales each month to ensure you do not go over the threshold without registering as you only have 30 days once you reach the threshold to register without incurring fines.
The VAT scheme is where you charge VAT to customers on your sales invoices and claim it back on your purchases. Each quarter you need to submit a return to HMRC stating your sales and purchases for the period. You will need to send HMRC a payment if your total sales exceeds your total purchases (which it will if you are profitable) – remember though that wages and tax are not included in your VAT returns only your sales and purchases.
Open a bank account
Keeping your business banking separate from your personal banking will help you keep your business financial records straight. You do not have to open a separate bank account but it can make monitoring your business finances and completing returns a lot easier, especially if you think you will have a large number of transactions in and out of your account.
Most banks charge for business bank accounts and they monitor individual accounts to make sure you are not using one solely for business use to avoid fees. Many banks offer charge-free periods and there is nothing to stop you switching banks when your charge-free term comes to an end.
Alongside your business current account you should open a savings account to earn interest on any profits that you are not drawing out of the company. Having a separate bank account to your personal bank will enable you to keep an eye on what profits you have in your account and what interest it is earning you.
Records are one of the most important things that is often neglected until the year end. Having an easy to use recording and filing system is extremely important. Knowing where your records are will ensure that your tax returns are done quickly and correctly and enables you to successfully monitor your business performance. Use a program such as Microsoft Excel to keep electronic records and have a specific filing place for sales information (enquiries, orders in process, paid invoices, outstanding invoices), purchase information (orders, delivery notes, paid invoices, outstanding invoices), bank statements and tax returns (VAT, Self Assessments etc).
Keep on top of your paperwork by filing as you go along and you will save hours of time when trying to complete your self assessment each year.
You should always be prepared for the unexpected! Make sure that you have the adequate insurance to carry out your business. As a self employed individual you do not benefit from limited liability and therefore are liable personally for any claims made against you financially or for defect work and injury. If you employ staff then you are legally required to obtain employers liability insurance but you should also consider getting professional indemnity insurance and public liability insurance.