Guide To Being Self-Employed

Being self-employed can be as daunting as it is exciting. From deciding whether you’ll work from home to bracing yourself for a lack of job security, there’s lots to consider.

To help you out, we’ve created the following guide to being self-employed.


Before you go self-employed

There are lots of things you’ll need to consider before you go self-employed:

  • Do you have a clear vision of the gap in the market you’ll fill?
  • Do you know how you’ll acquire clients and customers? (If not, take a look at our free guide to getting started in sales.)
  • Do you have enough money to set your business up?
  • Can you support yourself in times of low or no income?
  • Where will you work – from home, from a rented office?
  • Have you got all the equipment you’ll need, alongside any relevant insurance?

There are other things to consider too, such as the loss of holiday pay, sick pay, automatic pension contributions and other employee benefits.

When it comes to developing your business, one of the key documents you should be using is a business plan. This covers your business’s objectives, strategies, marketing plans and financial forecasts. This information can help you clarify your business ideas and spot potential problems.

You can download a business plan template here, and fill it in with your proposed business plan.


Self-employment options

  • Operate as a sole trader. You’ll run your business as an individual, and keep all your business’s profits after paying tax on them
  • Operate as a partnership. You’ll still work as a self-employed individual but all business partners share responsibility and profits. Each partner will submit a self-assessment tax return, pay National Insurance and income tax, but a nominated partner will also submit a tax return for the partnership as a whole.
  • Operate as a limited company. A limited company has its own legal identity. To do this, the company need to be registered at Companies House.

If you want to change from a sole trader to a limited company, make sure you read our blog on the topic:


Benefits of being self-employed

The advantages of being self-employed include, among many others:

  • You get to work on something you’re truly passionate about.
  • You have a more varied workload, as you’ll be working on multiple projects, and in different fields, at once.
  • Working on multiple projects gives you a chance to learn new skills.
  • Once you’re established, you could earn more money, as rates for the self-employed and freelancers tend to be higher than standard salaries.
  • If you’re working from home or your own premises, you can reduce or remove travel times and costs.
  • When calculating your tax owed, you can deduct selected costs, including travel and some utility bills, from your income.


Disadvantages of being self-employed

There are also disadvantages to being self-employed, particularly when it comes to the risks and added costs of going self-employed.

  • If you don’t already have it, you’ll have to secure money to pay for start-up costs.
  • It can be difficult to maintain a healthy work-life balance.
  • When you take a holiday or sick leave, you don’t get paid.
  • Your income isn’t guaranteed, so it can become difficult keeping up with regular outgoing such as rent and bills.
  • As a result, rental agreements, mortgages and securing loans can all be more difficult when you’re self-employed.
  • You’ll be responsible for all aspects of the business, including bookkeeping and filing proper tax returns.


Setting up as self-employed

If, like other UK sole traders and self-employed entrepreneurs, you’ve decided the advantages outweigh the disadvantages, then congratulations!

Next, you’ll have to follow these steps to become self-employed:

  • Register as self-employed with HMRC. This way, they’ll know you’ll pay tax through self-assessment and that you’ll pay Class 2 and 4 National Insurance. You’ll also be able claim some tax back. Read more about registering as self-employed.
  • Set up a business bank account.
  • Start bookkeeping to track incomings, outgoings and expenses. These will all be needed for tax returns and potential investors.
  • If you’re working from home, notify your landlord or mortgage lender. You’ll need to check you’re not in breach of any terms.

You’ll also have to look at business insurance. The two main types are “professional indemnity insurance” and “public liability insurance”. If you’re employing anyone else, you’ll need “employer’s liability insurance”.

Another key, and often overlooked, aspect of being self-employed is providing for your own pension. Make sure you take a look at our guide to pensions for the self-employed to better understand which option is right for you.


Can you be employed and self-employed?

Yes – you can work as both employed and self-employed at the same time. The way you pay tax and National Insurance will be different based on your employment status though.

For example, you’ll pay Class 1 National Insurance through PAYE for your employed work, but Class 2 and 4 for your self-employed work. Class 2 National Insurance is at a flat rate, either monthly or six-monthly. Class 4 National Insurance contributions are based on your self-employed profits.


Paying tax when self-employed

When you’re self-employed, your tax and National Insurance contributions are your responsibility. This is called Self-Assessment. You can learn more about Self-Assessment here.

One of the first things you need to do is submit your self-employed tax return. If you delay, you may be penalised by HMRC for not letting them know you’re self-employed.

How much tax you’ll pay as a self-employed person will depend on how much money you’ve made and the ‘allowable expenses’ you’ve incurred in the course of your business.

Certain business-related expenses can be subtracted from your income when you’re calculating your taxable profit, such as utility bills, council tax and broadband.

The tax-free personal allowance and the tax bands are the same for self-employed and employed people.

Filing tax returns when self-employed

As a self-employed person, you’re responsible for submitting the following things to HMRC:

  • Self-Assessment form
  • National Insurance

If you hire anyone else to work for you, you’ll also enlist them in a Pay As You Earn (PAYE) scheme. They’ll also be entitled to Auto-Enrolment for a workplace pension.


Managing your accounts when self-employed

One key skill you’ll have to develop when self-employed is keeping your books and accounts in order.

You’ll need thorough and precise records for correct tax filing, and keep detailed records for potential investors. Good bookkeeping and financial reporting also help you monitor the health of your business and help you keep it on the right path.

If numbers aren’t your strong point, try KashFlow’s software. It’s the easiest and most effective way to manage an essential part of your self-employed business venture. You can start a free trial here, or request a personalised 1-2-1 by calling 0844 815 5779.

See how IRIS KashFlow works with your business and your books