Good preparation is essential
Being your own boss – self-employment – can be an attractive way to work, with nearly 4.5 million people in the UK now working for themselves. The number of self-employed workers fell sharply during the Covid-19 pandemic but is now rising again.
You will be responsible for meeting all your administrative obligations as a self-employed worker, planning for your future and managing your own work–life balance. Good preparation is essential and there are five key areas to keep in focus.
You will need to pay your own tax and NICs. Register as self-employed with HMRC as soon as you start self-employment and in any case by 5 October following the end of your first tax year. HMRC has declared 2023/24 the transitional year for the self-employed to move from being taxed on accounting year profits to profits earned in the tax year, so choosing 5 April (or 31 March) as your accounting year end date will save having to apportion your profits in future tax years.
Class 2 NICs, currently £3.45 a week, count towards your state pension so even if your self-employment profits are too low to make class 2 NICs compulsory, it may be worth paying voluntarily.
Sometimes it is unclear whether you are actually self-employed or really an employee. The HMRC website has guidance on how to decide, but it may be preferable to take professional advice geared to your own circumstances.
You must keep accurate records of your business income and expenditure and draw up regular accounts. You should keep your personal and business finances separate, so it is advisable to open a business bank account. Your accounts will track how your business is doing and help you identify ways to increase profitability. If you are seeking any finance, such as a loan or overdraft facility, you will need to show your accounts, which are also essential for completing your tax return.
If your business has reached a turnover of £85,000 or more you will need to register for VAT. If you are near that threshold, you must monitor your turnover every month because there is a tight time limit for registration. You must also register for VAT if you expect your turnover to exceed £85,000 in the coming 12 months.
Most self-employed people take out public liability insurance to protect themselves from any claims arising from their business activities. You might also need a professional indemnity policy. If you employ someone, you must have employer’s liability insurance. Income protection insurance will help you pay your bills if ill health prevents you from working.
Finally, you will eventually want to retire. Try to ensure you set aside income to help build up your retirement funds – and remember contributions benefit from tax relief.