Have you been thinking for a while that you need a change of pace? Not feeling fulfilled by your current work/life balance? Maybe toying with the idea of going self-employed within your field but not sure where to begin? If this sounds familiar then check out our guide to becoming self-employed.
If you’re in the headspace where you’re not completely sure whether you should take the plunge and go self-employed or not, here are some thought provoking questions that you should ask yourself.
How much will it cost to go self-employed?
The initial start-up costs of going self-employed are often quite expensive, the main expenses tend to be:
Obtaining a workspace
If you require a workspace for your business this can not only be expensive but often quite difficult to find something suitable. Think about the location of your workspace as city centre rental will be more expensive than country dwellings, but how important is this to the success of your business? Do you require footfall or will your business be online? Before you make the jump and hand your notice in at your day job, do adequate research to see what space is currently available and at what cost.
Depending on the type of business you will be running, the insurance you need will vary. For example public liability insurance should be considered a must if members of the public are interacting with your business in anyway. Other insurance products that you might want to think about include income protection insurance, critical illness cover to protect you should you be unable to work and life insurance for people that have dependants that rely on their income. Look into these insurance products and decide which ones you will need and how much they cost. If you are going to be employing another person, legally you are required to take out employer’s liability insurance. You will need cover of at least £5million and a certificate of insurance must be displayed in a place employees can read it, penalties for failing to have this insurance in place are very costly.
It could be advisable to hire an accountant to process your end of year tax return and depending on how large your business is, they could look after your books also. An option to reduce costs would be to complete a book keeping course to reduce the amount of work you give the accountant, however you need to weight up time vs money here and whether it’s financially a good decision.
Staff and stock
Again depending on your business this may or may not be relevant to you. If you are thinking about hiring staff you will need to consider if it’s advisable to wait until you have a built a customer base that is generating a steady flow of work otherwise you could be spending more than you are bringing in. It’s also important to be aware that if you employ staff you will need to pay their National Insurance, holiday days, pensions and any other perks you decide upon. So make sure all of this in within your budget before you start hiring.
National Insurance costs
Once self-employed you will need to pay your own National Insurance contributions (NICs). A sole trader is required to pay Class 2 NICs on your income which is £2.95 a week for the 2018/2019 tax year. However if a sole traders profits are less than £6,205 in the 2018/19 tax year you will not have to pay Class 2 NI contributions. Self-employed workers also need to pay Class 4 NICs and for the 2018/19 tax year this is 9% on annual profits between £8,424 and £46,350 and 2% on any profits above £46,350. Whilst this sounds really confusing, if you have an accountant they will arrange everything for you, just letting you know what you are required to pay.
What are the benefits of being self-employed?
This might seem like a silly question, surely the positives outweigh the negatives? However always remember that with every positive there is a negative so it’s important to look at the bigger picture when making a decision. So, the main advantages of being self-employed are:
- You are able to set your own working hours that suit your lifestyle
- Because you’re the boss you get to make all business decisions
- You have the flexibility to set your own pricing structure
- You have free reign to take your business in whatever direction you wish
The risks of going self-employed are that you won’t have statutory holiday pay, you are responsible for everyone in your company and you will no doubt be extremely emotionally invested in your venture. However, for those that really do have the passion to become self-employed the end result can be very rewarding.
If you’re at the stage where you’ve decided that you 100% want to go self-employed but not sure what to do next, follow these steps:
Register your business
Registering your business is a good place to start! Making sure you have a robust business plan with clearly defined goals and a strategy to achieve this is pivotal. This business plan will help you to define your target audience, then ideas can then be generated to attract customers to engage with your business. You will need to register as self-employed with HMRC to ensure you are paying the right amount of tax, you can do this at any point until 5th October of your businesses second tax year. A tax year runs from April 6th to April 5th the following year and don’t forget you will need to complete your self-assessment tax return every year!
Seek legal advice
You may wish to consider seeking legal advice before you go self-employed just so you have all the facts and can get your head around all the legalities. Firstly you will need to decide whether you are going to operate as a sole trader or a limited company. If you need contracts with clients, you should get a legal representative to draw these up so they are watertight. Some of the other policies and procedures you might need to consider are:
- A risk assessment
- A complaints procedure should your customers not be satisfied with the product they have purchased
- A duty of care and safeguarding policy. You should have this in place in case you are concerned about someone’s safety
- If you are coming into contact with children or minors you will need an enhanced DBS check, previously called a CRB check
Set up a business bank account
For accounting purposes you need to ensure you keep your business and personal bank account separate. As a sole trader your business income will be taxed alongside your personal tax. Small business bank account fees don’t tend to be too expensive, usually around £6-£10 a month. There are usually transaction fees such a processing a cheque that you will have to pay, so make sure you understand all the fees before you open an account.
Do you need to register for VAT
If you are projecting that your company will have an annual turnover of £85,000 or more then you must register your company for VAT. If you don’t think you will meet this threshold initially you can register your company at any point, make sure you let HMRC know within thirty days as you could face a fine. The threshold was last amended in April 2018 and usually rises, so make sure you keep up to speed with the changes. Some businesses decide to register for VAT to look more authoritative as you get a VAT number and will be able to claim back VAT on eligible items the business purchases.
Keep on top of your books
It’s really important to get into the habit of keeping on top of your books and paperwork early on. You are obliged to keep an up to date record of all your business transactions. Not only does this make your life easier at the end of the financial year, but it gives you an up to date picture on how your business is performing. There are lots of online packages and even apps that allow you to keep on top of your books easily and quickly. Make sure you conduct some thorough research before choosing one, looking at customer reviews is always a good place to start.
Hopefully this has helped you decide whether you are ready to go self-employed and if you are, how to do it. If you know anyone that runs a successful business it’s always a good idea to sit down with them and get some advice, hindsight is a wonderful thing!