What do I need to be self-employed: Your top tips guide to self-employment

It doesn’t matter if you’re just starting out on your career journey, or if you’ve been working for well over a decade, setting up your own business is a daunting task that poses lots of questions and hurdles. 

For one thing, you need to decide on the right structure for your business, but this is just the start. You'll also need to learn what sort of taxes you'll need to pay, and how to pay them, as well as working out what sort of insurance your business will benefit from having the most - which is exactly why we've put together this guide of going self-employed tips.

Read on to learn more about all the essential steps that go into starting your own business.

What do you need to be self-employed: The basics

First things first, let’s start off with the very basics of what you need to think about when going self-employed, and that’s settling on what type of business you want to run, i.e., do you want to operate as a sole trader, a limited company, or a partnership.

Below is a breakdown of what each of these are:

Sole traders

Sole traders are the simplest of the three main business structures, one where you, (and you alone), run your own business. You keep any profits after tax, but you’re also responsible for any debts the business incurs.

This kind of business structure works for anyone working for themselves, but while you’re referred to as a business, you don’t have to have business premises or even a business name that differs from your own name - it just describes someone working for themselves.

Limited companies

The most direct alternative to operating a sole trader, setting up your business up as a private limited company may suit you best if you want your business to be a separate legal entity to you, though they are more difficult to set up.

Limited companies must be registered with Companies House, where a director and at least one shareholder must also be chosen to run the company. You’ll also have  to pay corporation tax on the profits the business makes and split what’s left between stakeholders.

Limited partnerships

A less common business option, but one that can have several advantages, limited partnerships are ideal for anyone setting up a business with one or more people in charge.

Like a sole trader, all members of the partnership are responsible for any debts the business incurs, and will all need to submit a self-assessment tax return to declare their personal income for the business, while someone will also have to submit a tax return for the business itself.

Limited liability partnerships

A fourth bonus business option that is rather uncommon, a limited liability partnership sits between a standard partnership and a limited company. Like a partnership, it can be set up between two or more people, but the company must also be registered with Companies House and be legally separate from the people who are running it.

This in turn gives you and the other partners protection should one of the partners leave or if the business gets into trouble, but it also comes with more admin work than a typical partnership model.

How to go about being self-employed: Important steps

Now that we’ve touched on the basics around picking your business structure, it’s time to look at our main ‘going self-employed’ tips to give you a more thorough understanding of everything that’s involved with setting up a business:

1. Registering your business with HMRC

Once you’ve decided what kind of business you’re setting up, the first thing you’ll need to do is tell the tax authority that your business exists. This is essential, both for legal and tax purposes, and should be done as soon as possible.

For those registering as a sole trader or partnership, you’ll need to apply for a National Insurance number, assuming you don’t have one already, and register for a self-assessment tax return by the 5th of October ahead of when your first tax return will be due.

So, for example, if you set up your business in September 2020, you’ll have to make sure you’re registered for self-assessment by the 5th of October 2021, as your first tax return for the 2020-21 tax year won’t be due until January 2022.

On the other hand, if you’ve opted to set up as a limited company, you’ll need to register an official company address, and choose a ‘SIC code’ to identify what your business does.

You’ll also need to register your business with Companies House, as well as for corporation tax purposes.

2. Understanding self-assessment income tax

As mentioned above, the kind of business you choose to set up will affect your personal tax liabilities in different ways, but a self-assessment tax return will be required no matter which whichever option you choose.

A self-assessment tax return must be submitted each year. If you file on paper it must reach HMRC by the 31st of October, while online submissions must be received by the 31st of January. It’s very important that you deliver this tax return before the deadline, as late tax submissions can incur some hefty penalties.

3. Working out if you need to register for VAT

No matter your business structure, you must register for VAT if your business’s VAT-taxable turnover is more than £85,000, which is the total value of everything you sell that isn’t exempt from VAT.

If your turnover is less than this, then you don’t have to register for VAT, but it might be beneficial if you pay a lot of VAT on items bought for your business, such as laptops, tools and even stationery. And if you do register for VAT, you may be able to claim the VAT tax back to a certain degree.

4. Deciding between traditional accounting and cash basis

Next up, you’ll need to decide how to process the money your business makes, as this has a bearing on your tax return. 

Most self-employed traders will opt for the cash basis option, which is suitable for those with an annual turnover of less than £150,000 operating as a sole trader or in a partnership.

Cash basis is when you pay tax and claim expenses based on when the money enters your account; so, in cases where you invoice someone several weeks before getting paid, you’d only look at the date you were paid for tax purposes.

For instance, say you invoiced a client in February 2020 for work, but didn’t receive the money until mid-April. While the work may have been agreed in the 2019-20 tax year, you wouldn’t need to report the income until you were doing your 2020-21 tax return, as that’s when the money was received.

However, with more traditional accounting, you will have to pay tax and claim expenses based on the invoice or billing date, whether you’ve received the money yet or not.

5. Researching what kind of insurance you need

Any business - whether you’re a sole trader or employ several people as part of a limited company - needs to have relevant insurance to protect it should anything go wrong in any area of the business.

For example, one of the most important types of insurance for traders is public liability insurance, which covers the legal costs and compensation of injury or damage should a member of the public sue your business. (It’s also necessary in order to be endorsed by schemes such as Which? Trusted Traders).

Alongside this, if you have business premises, these and the contents within them should be insured as well, while professional indemnity insurance is always worth having to cover any costs associated with customers finding fault with your work.

6. Settling on if you need a business bank account

While you don’t necessarily need to have a business bank account, particularly if you’re a sole trader or in a partnership, it can be helpful to have one in place - and you will definitely need one if you’re running a limited company.

Simply put, a business bank account is an easy way to keep your business finances separate from your personal spending, which can also make it simpler when declaring your income to HMRC.

Bear in mind, however, that some accounts will charge a monthly fee, so make sure you opt for one where you can make the most out of all the services it offers.

You’ll find business bank account options from most of the big UK banks, while challenger banks, such as Starling, also have app-only options, which could be handy for those who don’t mind banking solely online.

7. Updating your landlord or mortgage lender

One important thing to note when deciding to become self-employed is that you’ll be making a big change to your employment status, and therefore your landlord or mortgage lender should be notified - especially if you’re planning to run your business from home.

If you rent, you may need to get your tenancy agreement updated to reflect the changes.

Mortgages, on the other hand, can be trickier to negotiate, as many residential mortgages prohibit running a business from home.

You’ll need to speak to your lender to get permission, as breaching the terms of your contract may land you with a penalty. And if you’re looking to buy a property after becoming self-employed, the process of getting a mortgage when self-employed might look a little different. See our guide on mortgages for self-employed buyers for more information.

Grow your new business as a Which? Trusted Trader

With all our top points covered, you should have a much better idea of what to be aware of as you start your self-employment journey. Of course, once you’ve got your business on its feet, you’ll need to start thinking about growing your customer base – which is why you might want to consider becoming a Which? Trusted Trader.

As a Which? Trusted Trader, customers will get the peace of mind that your business is qualified to do the work they need, boosting your credibility and reputation. On top of this, we’ll also provide your business with its own profile on our site to display examples of your work and customer testimonials.

Get in touch today to find out more about becoming a Which? Trusted Trader, and don’t forget to visit our guide hub for more useful articles like this one.

Become a Trusted Trader

When customers see you displaying our logo, they'll know when you're a trader they can trust

Find out more