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Self-Employment: how to get started

Updated on 16 July 2014

Are you considering becoming self-employed? Find out everything you need to get started.

Would self-employment suit you?

It very much depends on your personality, as well as more practical considerations. Is there a need for the service you provide? Can you manage your time effectively? Can you manage your cashflow?

On a more practical note, if you're about to take the leap, make sure you're clued up on the following areas.

Tax

You need to register as self-employed with HM Revenue & Customs within three months, or you could be penalised. You can do this using these forms, or by phoning the HMRC's Newly Self-Employed Helpline on 0845 915 4515.

You'll be responsible for your own tax contributions, and will need to fill in a Self Assessment tax return form every year.

In a nutshell, you'll need to set aside at least 25% of your income (more if you're a higher rate tax payer) so you can pay your tax bill when it comes in. You could pay this money into a separate savings account, so at least earns some interest before it lands in the taxman's pocket.

National Insurance and student loan payments

The way you pay National Insurance contributions will also change. When you're self-employed, you're responsible for paying Class 2 and Class 4 National Insurance.

Class 2 contributions are a fixed weekly amount - currently £2.30. You can set up a standing order to pay these every month, or pay them quarterly by cheque or over the phone.

Class 4 contributions are calculated as a percentage of your taxable profits. Self-employed people currently pay 8% on annual taxable profits between £5,435 and £40,040, and 1% on any taxable profit over that amount

So, as well as tax, you need to set enough money aside to pay your Class 4 National Insurance bill at the same time.

If you're paying off a student loan, your yearly payment will be taken at the same time as you pay your tax and Class 4 National Insurance - so you'll need to set aside money for this as well.

The amount you'll need to repay will depend on your income, so check with the tax office to find out the percentage repayment that's likely to apply to you.

Cashflow and organisation

When you're self-employed, there's no regular salary. This means that if clients don't pay you on time, you could find yourself in a tight financial spot.

With this in mind, it's important to have a substantial savings cushion you can fall back against when the cash isn't flowing as it should. This cushion should be equivalent to three to six months' salary, or more if possible.

There are all sorts of models for book-keeping and accounting, so do a bit of research and choose the one you're most comfortable with (a basic Excel spreadsheet suits me fine!). The following tips should point you in the right direction:

  • When you're starting out, keep costs as low as possible. You'll probably need to pay for a decent computer and reliable broadband connection, but there are plenty of areas in which you can cut back. For example, if you start working from home, your utility bills could rocket - so see if you can save money by switching your gas and electricity suppliers.
  • When invoicing clients, include a clear time limit (for example 30 days) and politely but firmly chase late payments. Keep paper and electronic copies of all invoices sent.
  • Remember that all expenses related to your work are tax-deductable. These could be anything from relevant travel expenses and stationery purchases to broadband and heating bills. Keep all receipts, bills and bank statements in clearly-marked folders. You need to keep any paperwork relating to tax for at least seven years.
  • Start a `work diary' where you log your professional activities every day. As well as keeping things clear in your own mind, this log will provide additional written proof if HMRC queries your expenses claims for heating, travel and so on.

Pensions and benefits

You'll also need to factor in the loss of company benefits. You may be able to do without the gym membership and the dental care plan, but what about the 25 days' holiday, paid sick leave and the pension scheme? Gulp.

Don't get left out in the cold when it comes to pension contributions. Instead of contributing to a company scheme, consider setting up your own stakeholder pension scheme.

With stakeholder pensions, charges are capped by the government. You'll benefit from tax relief and the flexibility to stop and start your contributions, as well as being able to take the pension with you if you do become employed in the future.

This GOV.UK guide has lots more useful information on the legal and practical ramifications of becoming self-employed. Good luck!

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Comments



  • 05 January 2009

    The article briefly mentions Business Link, but they are really the first port of call if you are considering setting up your own business, either as a self employed person or as a limited cimpany.

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  • 05 January 2009

    Self-employment (SE) and being an employee (E) offer advantages and disadvantages. Combine the two, working part time E and full/part-time SE and some of the disadvantages are allieviated. A slow period for SE means a possibility for overtime at E (more companies are using shorter contracts meaning they pay less holiday pay, hoping employees will do some overtime to have the same staffing level). Staff benefits/discounts are often the same for part-time and full-time staff. Obviously finding shifts that fit in with the SE may not be straight forward, and dependent on the type of SE business and location. If your SE business really takes off, you can leave E. If your SE business ceases to trade I feel your CV looks better having some continued employment. You may also be able to increase your contract at E. The only downside is that E may be menial work, but it does give you a break from any SE problems, so you can come back refreshed.

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  • 04 January 2009

    The tax office run courses on how to set up as a self trader/company etc. But...they will NOT advise you. They will tell you what you can claim for and what you cant. Is it better to have a company car, which might be taxed as a perk if you use it for non company business (and could loose it if you fail) or to have a non company car and claim 44p/mile on company business? Your insurance may be affected if you use your car for company business. If you purchase an 'asset' (eg convert your garage to an office- council tax people my be interested in that one) you can only claim 50% of the cost in the first year then 25% of the remaining amount in subsequent years, this will continue ad-infinitum not over 3 years as some people think. So you may need lots of money to set up. You can only offset losses for a limited number of years against other income and then they class your business as a hobby until it starts to make money. The tax office should be your first port of call. Just don't expect them to help you fill in your tax form. The article seems to assume that the new self employed are going to be office workers - interesting.

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