Becoming self-employed: what do I need to know?
Going self-employed and building your own business while you are in your twenties or thirties can reap dividends. However, what skills, experience and personal characteristics are necessary?
Advantages of being self-employed
Being your own boss instead of being employed certainly offers some advantages. Usually, it is possible to choose where you work and your customers. In addition, as individual effort generally leads to direct reward, many self-employed entrepreneurs find that they benefit from a high degree of job satisfaction.
Other positive points include more flexibility and independence than when working as a typical employee. Sometimes, the potential earnings are higher, especially as a business grows over time. What is more, even if longer days and extra hours are necessary, it is possible to set one’s schedule.
Additionally, freelancers tend to gain a broad portfolio of useful skills: selling products and services, invoicing, credit control, managing suppliers and so on. Then, on the financial side, it is possible to reduce income tax by claiming legitimate business expenses against gross income.
Skills and personal qualities for success
Television series such as ‘The Apprentice’ highlight the importance of balancing commercial acumen with personal flair. Naturally, a healthy level of confidence and people skills will also help if you want to succeed, along with knowing what you want to do and having a clear, workable plan. An acceptance of responsibility, a willingness to take charge when the situation demands and seeing a task or project through to completion are all keys to success.
In general, natural leadership or good management qualities will help a budding entrepreneur. Along the way, he or she will probably need to be creative or capable of lateral thinking. At times, excellent organisation and steely determination are a bonus. The ability to make things happen is a crucial requirement for growing businesses, expanding client bases and increasing income, as much on a rainy winter morning as during lucky breaks and streaks of success.
Motivational speakers mention the need to organise the working week, make telephone calls, build relationships, reply to customers and master bookkeeping. Then there is also the perception and good judgement required to spot opportunities and develop business ideas and plans, whether from small beginnings or within an existing organisation. Once set up and in motion, the fledgling project will require concerted effort while also keeping an eye on performance and recognising when it is necessary to make adjustments.
Self-employed opportunities
As well as starting up your own business, some companies list self-employed positions on recruitment boards. Depending on the area of the UK, such opportunities vary in scope from couriers and HGV drivers to sales executives, account managers, personal fitness trainers and auditors.
Notably, full time and part time self-employed work of this type may require applicants to attend induction sessions, with travelling costs (and accommodation if applicable) at the applicant’s expense. Typically, van driver positions include same-day delivery services, multi-drop schedules and shift work, coordinated by a control centre. These posts demand flexibility and on-call working, with occasional weekends. Alternatively, other self-employed jobs include financial advisors, bedroom designers and healthcare training.
Whether starting as an entrepreneur, be it as a sole trader, in a partnership or as a limited company, all types of self-employment share a common theme. Usually, the results are generally in direct proportion to the time and effort put in.
Points to consider
In self-employment, there are – by definition – no regular payslips, bonuses or paid holidays that employed members of staff receive, nor perks and benefits such as healthcare. Nonetheless, self-employed workers point to the fact that even supposedly permanent contracts with an employer are not necessarily secure; the so-called job for life disappeared years ago.
Other considerations include the fixed costs associated with leasing or renting a property (if required) and registering a business name. Similarly, monthly overheads will consist of liability insurance, utility supplies and professional fees such as those for an accountant or tax adviser. To keep personal finances simple, it is advisable to open a business bank account.
Regulations and finances
In the UK, HMRC (Her Majesty’s Revenue and Customs) administer PAYE (Pay As You Earn) income tax and VAT (Value Added Tax). With your National Insurance number, it is possible to register as self-employed online with HMRC or to contact a tax office and make an appointment.
With regard to financial records, it is necessary to maintain records of sales or other income, along with expenditure. Do remember to record and keep receipts or invoices, as these will be useful to reduce tax liability correspondingly. Income tax payments are due half-yearly, at the end of each January and July.
Most self-employed people opt to have an accountant. Professional support is not essential, but it is usually a good idea. With accountancy support, entrepreneurs can spend more time on core activities and growing their client base. Additionally, because accountants will be able to provide professional advice on business planning, self-assessment tax and freelance pension arrangements, the liability resulting from the tax return could well be lower than it otherwise might have been.
While accountants advise on pensions, NICs (National Insurance contributions) and the annual self-assessment tax return, accounting technicians or assistants can assist with routine questions. Also, there is a wealth of information and advice on the gov.uk website (https://www.gov.uk/browse/business). Topics covered include:
- Setting up in self-employment and starting a business.
- Finance, support and writing a business plan.
- Registering and setting up.
- Business insurance, premises and rates.
- VAT, self-assessment and tax return submission.
- Universal Credit, both for employed workers and when working for oneself.
- Running a limited company including employee tax and National Insurance.
- Company accounts and corporation tax.
HMRC posts a code to your address, so it takes around ten working days to complete the registration process. Ideally, registration should be completed ASAP after starting a business and no later than 5th October in the second tax year in which the small business began. The UK tax year runs from 6th April to the following 5th April. Companies that turn over more than £85,000 must register for VAT (see https://www.gov.uk/vat-registration-thresholds). Below this level of gross turnover, registration is optional.
Self-employment: sole trader, partnership or limited company?
For many individuals who become self-employed, a common initial step is to start as a sole trader. As such, after earning the personal allowance, there will be a liability for income tax and National Insurance contributions (NICs).
Apart from working as a sole trader, it is also possible to set up a business partnership; such arrangements are relatively common in law, accountancy, architecture and engineering. Alternatively, consultants and some short-term contractors may choose to opt for a limited company structure. In such cases, HMRC characterises self-employment as running a business oneself with numerous customers and providing a service using equipment that is the property of the owner.
Finally, in the case of limited companies, the differing structure and taxation requirements probably merit professional accountancy services.