Starting out as self-employed in the UK is relatively straightforward. Many people begin as a sole-trader (another term for running your own business as an individual and being self-employed) whilst they are also working for someone else. This means you can test the water and see whether it suits you before jumping in with both feet.
It’s an exciting time – being your own boss provides you with endless possibilities and a lot of freedom.
untied — the UK’s personal tax app, helps the self-employed stay compliant with their taxes, but here are five key points that you should think about as soon as you can, to make sure things go as smoothly as possible.
Is going self-employed right for you?
Obviously, the decision to become self-employed is yours and yours alone. It can involve taking on risks that need to be weighed up against the potential rewards. Some people love being their own boss, whilst for others it doesn’t suit them at all.
There are a lot of advantages to self-employment, with potential pros like choosing when and where you want to work; what you do and who you work with; higher earning potential and creative freedom – all which can result in an improved quality of life.
For many self-employed people, the advantages far outweigh the drawbacks, but it’s still important to know the potential negatives of working for yourself. The biggest disadvantages have to be the social isolation and the fact that your income can be irregular, especially in the early days. There are long hours when you are establishing yourself and you won’t get sick pay, holiday pay or any other employee benefit. You are also in charge of your own pension, National Insurance and completing your self-assessment tax return – although untied can help you here 😊.
At the end of the day, if this is something you want to do and are passionate about being the master of your own destiny, going self-employed may be right for you.
Decide what business structure is the best for you
Once you’ve decided that you want to become self-employed, the next thing to consider is how your business will be structured. Options include being a sole trader, becoming a partner in a business partnership or setting up your own limited company.
How you choose to structure your business will affect how much you pay in tax, the level of risk or liability to your personal assets (e.g. your house, personal savings), and also your ability to raise capital from different sources. This makes choosing the right structure a high priority when starting your business.
Read more about the differences between being a sole trader and a limited company.
Register as self-employed with HMRC so you can pay your taxes and National Insurance
If your annual income is more than £1,000 as a sole trader (or from renting out property), then you need to register with HMRC and file a tax return. The deadline to do so is 5 October following the year when you started earning as self-employed. If you've missed the deadline, don't worry, just get your form in as soon as you can.
The quickest way is to register via untied but you can also fill in forms at HMRC.
Work out if you need to pay VAT
Value Added Tax (VAT) is a common item on many bills and receipts. The standard rate is 20%. But is VAT something that every business needs to charge?
Businesses in the UK need to register for VAT only if their annual taxable turnover in the last 12 months or the next 30 days is greater than the VAT threshold. This figure is set and reviewed by the government and is currently £85,000.
Some businesses however choose to register for VAT voluntarily even if they are below this threshold so they can reclaim VAT on goods and services they’ve purchased from other businesses – this may be useful to recover VAT incurred in start-up costs or if you have large outgoings in order to service your customers (ie raw materials or manufacturing costs).
There are however disadvantages to registering for VAT before you are obliged to – for instance it creates a significant admin burden (you need to file VAT returns four times a year) and it also makes your goods or services seem more expensive and less appealing to customers who aren’t VAT-registered themselves.
Most people start their business as self-employed without the additional admin burden of registering for VAT. You can always choose to register for VAT later as your business and revenue grows, and you get closer to the VAT threshold.
Keep accurate and up-to-date financial records
If you are starting a new business, it is essential that your financial records – particularly those involving tax - are accurate and up to date. Not only does it make budgeting so much easier, but it is also vital for tax purposes and helps you apply for a mortgage.
untied can help you see all of your finances in one place, so you can take control of your taxes. You can see how much tax you owe in the untied mobile app or in your browser, so you can file your tax return before the deadlines, without any stress. It’s best to keep accurate records of income and what you've claimed as business expenses throughout the tax year so that everything is in order. Do all this and more in the untied app.
If you’re looking to reduce your tax bill, check out what expenses you can claim, and when you’re ready to do your taxes, untied's tax return checklist makes it even easier to ensure you don’t miss anything.