5 Things You Need to Know Before Becoming Self-Employed in the UK
Published 28th of April 2011·Updated 1 April 2026
Reviewed by: Reviewed for accuracy April 2026
Becoming self-employed in the UK is straightforward to set up but comes with real financial and legal responsibilities. You must register with HMRC, pay your own tax and National Insurance, keep accurate records, and hold appropriate insurance. Getting these right from the start saves you penalties and stress later.
Short Summary
You must register with HMRC as self-employed within three months of starting to trade. Failing to register on time can result in a £100 fine, with larger penalties for longer delays.
Self-employed people pay income tax through Self Assessment and pay Class 2 and Class 4 National Insurance contributions, depending on their profits. Your first tax bill can feel large if you have not set money aside; a common rule of thumb is to save 20 to 30 per cent of your income for tax throughout the year.
You need to register for VAT if your taxable turnover exceeds £90,000 in any 12-month period (the threshold as of April 2024). Below this threshold, registering voluntarily can benefit some businesses.
Keeping your business finances separate from your personal finances, even if you are a sole trader with no legal obligation to do so, makes bookkeeping and tax returns significantly easier.
1. Register with HMRC as self-employed
You must register with HMRC as soon as you start trading as a sole trader. You can register online at gov.uk by setting up a Self Assessment account. HMRC requires you to register by 5 October in your second year of trading at the latest, but registering immediately is advisable.
Once registered, you will file an annual Self Assessment tax return by 31 January each year (for online returns) covering the previous tax year ending 5 April. Your first return covers the period from when you started to the following 5 April. Any tax owed must be paid by the same 31 January deadline. HMRC can charge interest on late payments and a minimum £100 penalty for a late return, even if you owe nothing.
2. Understand your National Insurance obligations
As a self-employed person, you pay two classes of National Insurance, unlike employees who pay only Class 1.
| NI class | Applies when | Rate (2024/25) |
|---|---|---|
| Class 2 | Profits above £12,570/year | £3.45 per week (flat rate) |
| Class 4 | Profits between £12,570-£50,270 | 9% |
| Class 4 (higher) | Profits above £50,270 | 2% |
Note: From April 2024, Class 2 NI is no longer payable by most self-employed people with profits above the Small Profits Threshold, as it has been absorbed into Class 4 for those with profits above £12,570. Check gov.uk or consult an accountant for the current rules, as these change annually.
3. Register for VAT if your turnover exceeds the threshold
If your taxable turnover exceeds £90,000 in any rolling 12-month period, you must register for VAT with HMRC within 30 days. Once registered, you charge VAT (usually at 20 per cent) on your sales, file quarterly VAT returns via Making Tax Digital software, and pay HMRC the difference between the VAT you collected and the VAT you paid on business purchases.
Voluntary VAT registration below the threshold can be beneficial if your clients are VAT-registered businesses (who can reclaim the VAT you charge) or if you have significant VAT-able expenses to reclaim. If your clients are mostly consumers or small businesses unable to reclaim VAT, voluntary registration is less attractive.
4. Open a dedicated business bank account
As a sole trader you have no legal requirement to hold a separate business bank account, but doing so makes bookkeeping considerably simpler and keeps your tax records clean. Most accountants strongly recommend it.
Business current accounts are offered by most high-street banks including Barclays, HSBC, Lloyds, and NatWest. Many charge a monthly fee of £5 to £10 after a free introductory period. Challenger banks such as Starling, Monzo Business, and Tide offer free business accounts with accounting integration tools, making them popular choices for sole traders and freelancers.
5. Get the right insurance
As a self-employed individual you have no employer to protect you financially if something goes wrong. Consider the following policies:
- Professional indemnity insurance: covers claims that your advice or service caused a client financial loss. Many professional bodies require members to hold this.
- Public liability insurance: covers claims that you caused injury or property damage to a third party. Essential if you visit clients' premises or work in public spaces.
- Employers' liability insurance: legally required if you employ anyone, even on a temporary or casual basis.
- Income protection insurance: pays a proportion of your income if you are unable to work due to illness or injury. As a sole trader, you have no sick pay entitlement from an employer.
Frequently Asked Questions
Can I be self-employed while also working for an employer?
Yes. Many people start a self-employed business alongside employed work. You pay PAYE tax and Class 1 NI through your employer as normal, and report your self-employment income separately through Self Assessment. HMRC will calculate any additional tax owed.
How much tax will I pay as a self-employed person? You pay income tax on profits above the personal allowance (£12,570 in 2024/25). Profits between £12,571 and £50,270 are taxed at 20 per cent (basic rate), and profits above £50,270 at 40 per cent (higher rate). You also pay Class 4 National Insurance on profits above £12,570. Putting 25 to 30 per cent of your income aside for tax is a sensible precaution.
Do I need an accountant as a sole trader?
It is not a legal requirement, but many self-employed people find an accountant saves them money overall. A good accountant identifies allowable expenses you may have missed and ensures your return is accurate, reducing the risk of an HMRC investigation. Fees typically range from £250 to £700 per year for a sole trader.
What business expenses can I claim as self-employed?
Allowable expenses are costs incurred wholly and exclusively for business purposes. These include office costs, travel (excluding commuting from home to a regular workplace), professional subscriptions, marketing, and equipment. You can also claim a proportion of home costs if you work from home, using HMRC's simplified expenses calculator.
What happens if I cannot pay my Self Assessment tax bill?
Contact HMRC before the payment deadline. HMRC offers Time to Pay arrangements for people who cannot pay in full, allowing you to spread payments over an agreed period. Interest is charged on amounts paid late, but penalties are lower if you communicate proactively rather than ignoring the debt.