What to consider before going self-employed

If you are considering becoming a freelancer, self-employed person, or independent contractor, there are things to consider before you start your journey to self-employment.

Being self-employed can give people the freedom to choose the type of work they do and the hours they work and obtain a work-life balance. However, there are considerations before you launch into self-employment.

In this blog we will look at things to consider before going self-employed and ongoing responsibilities that you will also need to be aware of.

Understanding self-employment

What does self-employment mean?

Self-employment means working for yourself and not for an employer and taking sole responsibility for your own financial success and your business success or failure.

Self-employment can be running a business as a sole trader, limited company, or partnership. In this blog, we will focus on being a sole trader but will look at the differences of each business structure.

As a self-employed individual, you have the increased responsibility of generating work, running a business, deciding when and where you work, and personally managing your business’s finances and operations.

Self-employed workers are responsible for:

• Taxes: You will be responsible for registering with HMRC, income tax, National Insurance contributions, Corporation Tax (if running a limited company), VAT and tax returns.

• Record keeping and accounting: If you’re self-employed as a sole trader or a partner in a business partnership, you’ll be responsible for keeping accurate records of your business income and expenses for your tax return.

• Business and personal finances: You will need to carefully manage your business and personal finances and cash flow. This will include keeping accurate business records, tracking business expenses, and potentially opening and running a business bank account.

• Staff: You may decide to employ people, and this means you will be responsible for paying their salaries and taxes, such as national insurance contributions and income tax.

• Insurance: If you are self-employed, you may need various forms of business insurance to protect your business and staff.

• Building new business: You will be responsible for finding potential clients, meeting their needs, and continuing to trade with them.

Being your own boss can have huge benefits but also comes with a huge amount of added responsibility that you don’t consider when being employed.

Setting up as self-employed

Register as self-employed and for self-assessment with HMRC

Going self-employed is a big decision to make. Once you start operating as a sole trader or through a business partnership, you will be solely responsible for paying HMRC income tax on your taxable profit and National Insurance (NI).

You must register for Self Assessment by 5 October 2024 if you have to send a tax return and you have not sent one before. If you’ve registered for Self Assessment before but did not send a tax return last year, you must register again to reactivate your account.

An individual’s income tax year runs from 6 April to 5 April each year.

Registering with the HMRC is a fairly simple process. You need to register with HMRC as self-employed to pay tax through Self Assessment and file a tax return every year. You must register within three months of starting your business.

Find out more about how to register as self-employed here.

Choosing a business structure

You must decide on a legal structure for your business, such as a sole trader, limited company, or partnership.

Many self-employed individuals start as sole traders or choose to run a limited company from the beginning of their business journey. Here’s what each option can offer you.

Sole trader

Fundamentally, a sole trader is a sole business owner and a self-employed person. Operating as a sole trader is the most convenient way to start a business, because of its simplicity, sole trader is the most popular structure in the UK for new UK businesses.

Limited Company

A limited company structure means the business is legally separate from its shareholders and directors for its finances and taxes. This gives the individual better protection should issues occur with the business.

To consider the pros and cons of each structure, including tax implications and personal liability, read our blog: Sole trader vs limited company: the pros and cons

Other types of business structures include partnership and limited liability partnership.

Financial considerations

Understanding tax obligations as a self-employed individual

The first thing you should do is to consider hiring an accountant, such as dns accountants to help with your financial and tax obligations.

There are a variety of taxes you need to pay when self-employed, and it’s essential to know when and why you must pay them. They include:

• Income tax

• VAT

• National Insurance

• Business rates

• Corporation tax

As a sole trader, you’ll need to pay income tax on your business profits and National Insurance contributions. To report your income, you must file a self-assessment tax return every year and pay any tax due by the deadline.

How much tax you pay will depend on your business activities’ taxable profits. Your taxable profits are the difference between the income your business generates minus any business expenses. If your business incurs everyday expenses, you can deduct some of these business-related allowable expenses from your income to work out the profit on which you must pay tax.

Find out more about self-employed and freelancers business expenses here.

Funding your business

Before deciding to become self-employed, you should consider the costs of starting and running your own business, including equipment, premises, and staff.

If you don’t have the money to set up a business, you could consider funding options, such as a business loan, self-employed grants, credit card, or overdraft. To gain external funding, you should have a well-thought-out business plan.

Opening a business bank account

If you choose to run a limited company, you will required to open a separate business bank account to keep your personal and business finances separate. It’s worth considering having a separate bank account also as a sole trader to keep your business and personal finances separate.

Consider factors such as fees, overdraft flexibility, in-credit interest, and apps offered to manage your finances when considering business bank account options.

Managing business finances

Keep accurate and up-to-date financial records, including all of your income and expenses in relation to your self-employment.

Protecting personal finances as a self-employed individual

It’s advisable to hire an accountant to manage your finances and tax obligations. If you are self-employed and operate as a sole trader, it’s advisable to keep your personal income and business income and costs separate by running separate bank accounts. Consider carefully the impact of business failure on your personal finances.

Employee benefits

When you are your own boss and are no longer an employee, you should consider the employee benefits you lose, such as:

• Sick pay.

• Paid holiday.

• Business expenses paid by your employer.

• Employer pension contributions.

• Healthcare.

It is worth factoring these into your costs of running a business or being self-employed.

Business insurance

There are specific insurance policies that a self-employed individual or business owners need to have. You’ll need business insurance to protect your business (and you and any staff) should anything go wrong.

The type of business and self-employed insurance cover depends a lot on the business type and the industry sector in which you operate. Insurance to consider is:

• Public liability insurance.

• Employers liability insurance.

• Professional indemnity insurance.

• Personal accident insurance.

• Business contents and property insurance.

Finding clients and marketing services

Business owners and self-employed workers are responsible for finding clients and marketing their services. You should consider the best way to market your business, including a website, advertising, networking, and social media marketing. You should ensure you budget for any marketing that you want to do to launch and maintain your business.

Self-employed life

Self-employment can give you added motivation and freedom. However, you should consider the impact of having the added responsibility of running your own business and being self-employed and the impact of these on your mental and physical health. Being self-employed may offer you a better work-life balance, but it comes with added stress.

Financially, being self-employed can mean peaks and troughs of income, and you will potentially need some funding or spare income to fund yourself, your new business, and as a safety net.

Keeping accurate records and your business and personal finances separate is imperative to avoid getting behind on things like tax payments. It is also advisable to put money aside for your income tax bill to ensure you can pay your tax bill when necessary.

Can I go self-employed while working for an employer?

The simple answer is yes. It’s possible to be self-employed while working for an employer. However, you should consider whether there is any conflict of interest and make sure you’re aware of your employment contract and any restrictions on outside work. It may be a good idea to notify your employer.

Also, consider the tax implications, as you must state your employment status to HMRC. You’ll also be required to submit a self-assessment tax return each year to declare both your employed and self-employed income to HMRC.

Conclusion

Starting a new business and going self-employed can be the best decision you ever make. However, there are many things to consider when taking the leap into self-employment. It comes with added responsibility and sometimes stress.

Being well prepared with a well-thought-out business plan and some money behind you to act as a safety net in the early days of the business is advisable.

When you start your new business venture, you must register as a self-employed person with HMRC and submit a self-assessment tax return each year.

How can dns accountants help me?

The business experts at dns accountants offer a full range of services for all your accountancy, tax and startup needs. This includes:

• Company formation

• Business bank account

• Accounting software & apps

• Bookkeeping

• Self-assessment

• Year-end accounts & corporation tax returns

• Monthly payroll & payslips

• Quarterly VAT returns

For help and advice on going self-employed or starting a business contact dns accountants today on 033 0088 3616, email contact@dnsaccountants.co.uk or book a free consultation.

Speak with an expert

Any questions? Schedule a call with one of our experts.

Book a call