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How to Become Self-employed in the UK: A Complete Guide

According to the Office for National Statistics, self-employment has contributed over 15% to the overall UK labour market, with more than 5 million self-employed people in the UK. The self-employed workforce has also contributed over £300 billion to the national economy.

However, despite the appeal and benefits of this career path, it is not right for everybody.

If you want to be certain that self-employment is right for you, keep reading.

This guide will discuss the pros and cons of self-employment, types of self-employment, and how to set up your business.

So let’s get right to it.

Deciding if Self-employment is right for you

Here at Future Fit, some of our personal training and nutrition students choose to be self-employed for different reasons; some because of the flexible hours and others because of the increased income.

But before you go down this route, there are several factors that you have to consider:

You should also consider that while there are numerous perks of being self-employed, there are also downsides.

Benefits of Self-employment

  • You have more control of your working hours
  • Self-employment offers flexibility that normal employment doesn’t
  • You can control your income
  • Self-employment gives you creative freedom
  • There is potential to earn more money
  • You can work from anywhere

Read more about finding a job or starting your own business.

Drawbacks of Self-employment

  • Unpredictable income
  • Getting capital can be difficult
  • You are in charge of your record-keeping, pension, national insurance, tax return, and business registration
  • No employment benefits like PTO
  • There is no work-life balance
  • Approval for mortgages, loans, or property rental can be difficult
  • Self-employment can result in social isolation

Different types of self-employment

As mentioned earlier, you have to decide the type of structure you want your business to have as there are different types of self-employment. Highlighted below are some of them.

  • Sole Proprietorship

A sole proprietorship, also called sole trading, is a type of business structure where one person owns the business. You are entitled to keep all after-tax profits as a sole trader, but you are also liable for all the business losses as your personal and business assets are not separate.

Although a sole proprietorship refers to businesses that have no employees apart from the owner, your business can have extra employees and be registered as a sole trader. Besides, you don’t need to have a business location to be a sole trader, and you need to register your business with HM Revenue & Customs (HMRC).

  • Partnership

A partnership is when you combine your resources with one or more people to form a business, and you all share the risks, bills, profits, and losses of the business. This partnership usually involves a legal agreement, where everyone knows their contributions and profits.

All partnership members are also responsible for any debts, and all business debts have to be dealt with as Joint and Several Liability. Plus, a partner does not have to be a person – a limited company counts as a legal person and can be a partner.

All partners need to choose a nominated partner responsible for managing the business records and the partnership’s tax returns. Also, as the nominated partner, you need to register your partnership for Self-Assessment with HM Revenue & Customs (HMRC)

  • Limited partnership

A limited partnership needs at least one general partner and one limited partner. These partners have different responsibilities to the business. The general partner controls and runs the business and is liable for the partnership’s debts.

In contrast, the limited partner is liable for only the amount they invested in the business originally, and they cannot make any decisions for the business. However, all partners pay tax on their respective share of the profits.

  • Private limited company

A private limited company can be referred to as a legal entity that is separate from its shareholders or owners. This means that the company is treated as an individual entity with its own business assets, liabilities, and profits. The company usually has a director, which is legally responsible for managing the company, and one or more stakeholders. Unlike a sole trader, the owners and shareholders of a private limited company are not personally responsible for any company debts or risks, as they are considered employees.

There are two types of private limited companies in the UK – a private company that is limited by shares and a private company that is limited by a guarantee. For the former, there are shareholders, while the latter involves a group of guarantors. Besides, a private limited company will have to pay Corporation Tax on profits, submit tax returns to HMRC and present annual accounts to Companies House.

  • Limited liability partnership (LLP)

A limited liability partnership combines a partnership and a limited company. Like a partnership, two or more people can form an LLP, and members can either be individuals or companies.

Every member pays tax on their profits shares, but they are not personally liable for any debts the business incurs. Additionally, there must be at least two designated members at all times, and you can have any number of ordinary members. All members must also register for Self Assessment with HMRC.

Tax for self-employment

The tax you’ll pay as a self-employed person depends on your income and admissible expenses. Self-employed individuals pay income tax on just their trading profits – not their total income. You can simply deduct your business expenses from your overall income to calculate the trading profits that you’ll pay income tax on. The amount of income tax you pay will also depend on your trading profits;

  • £0 to £12,570 will pay no income tax on their profits
  • £12,571 – £50,270 will pay 20% income tax
  • £50,001 – £150,000 will pay 40% income tax
  • Over £150,000 will pay 45% income tax

As a self-employed person, you’ll also have to pay Class 2 National insurance contributions if your profits are at least £6,725 during the 2022-23 tax year. If your profits are £9,880 or more in 2022-23, you’ll also pay Class 4 National Insurance contributions. These contributions are voluntary, but they can help you get State Pension and benefits.

If you have a private limited company or limited liability partnership, you’ll need to pay Corporation Tax on your profits. Besides, you’ll have to submit a Self-Assessment tax return for any money you earn through your ltd or LLP Company.

What the difference is between employed vs self-employed

A self-employed person works for themselves as a business owner or a contractor, and they are usually responsible for managing every aspect of their business. On the other hand, an employed person either works for an individual or a company, and there are designated tasks they are in charge of. There are a few other differences between self-employment and employment highlighted below:

  • Income

As an employee, you have a fixed monthly income, but you can increase your income significantly if you are self-employed.

However, you must have a strong client base to be able to earn more than your monthly salary. Your marketing and advertising techniques to get new clients will also affect your total monthly income if you are self-employed.

  • Taxes

As an employee, the company you work for will directly deduct your tax from your salary. But if you are self-employed, you are responsible for calculating and paying your taxes.

  • Benefits

If you are employed, you are entitled to some benefits on top of your salaries like bonuses, commissions, health care, and gym memberships. However, these benefits will affect your business’s revenue if you are self-employed.

  • Pension

As an employed person in an organization, some deductions are usually taken out of your salary monthly. These deductions often go towards your pension, and some employers increase your pension contribution by matching yours. However, if you are self-employed, you will have to establish your own pension structure personally.

Going self-employed checklist

Once you have decided to be self-employed, there are different decisions you have to make, from thinking about the business structure to insurance and taxes. Outlined below is a non-exhaustive checklist you can use to ensure you cover some of the main steps.

  • Choose Business Structure

Before doing anything, you have to decide the type of business you want to set up. Do you want to be a sole trader, start a limited company, or enter into a partnership with other people? Answering this question will help you further down the line as each of these self-employment types have distinct requirements.

  • Create a Budget

Once you’ve decided on your business structure, the next step is to make a budget. What are the costs involved in starting and keeping your business operational? You also need to consider other costs like bills, food, rent, and utility. If you don’t have the money to start the business, you can now look into taking a business loan from banks or other investors.

  • Make a business plan

Even though not everyone has one, a business plan is important for different reasons – you need to set the core objectives of your business and develop different business ideas.

You also need a business plan to ensure that your business is well structured and looks professional to potential investors and lenders. This plan is what you will present to banks when you need capital for your business, and without it, they would not take you seriously.

  • Companies House Registration

If you decide to set up a private limited company or limited partnership, you must register your business with Companies House. You also need to pay corporation tax and draw up a memorandum of association for your limited company.

  • HMRC registration

You must inform HMRC as soon as you become self-employed, regardless of whether you are a sole trader or a business partnership. This way, they can be aware that you need to pay tax through Self Assessment and also pay National Insurance contributions. The tax year runs from 6th April of the preceding year to 5th April of the next, and the latest you can register with HMRC is 5th October of the tax year you became self-employed.

  • Self Assessment Registration

You need to register for Self Assessment to pay your own taxes as a self-employed person. For partnership businesses, the nominated partner has to register the partnership, while all members have to register for Limited Liability partnerships. National Insurance contributions and income taxes are paid on your self-employed earnings in arrears. Thus, any tax you owe on money earned in the 2022/23 tax year is not due till January 2024.

  • VAT registration

If your business has an annual turnover of £85,000 or more, you need to register for value-added tax. You can also register for VAT with a lower turnover, as having a VAT number gives you more credibility, and you will be able to claim the VAT back on some purchases. Once you have registered, you need to start charging VAT on the products and services you offer.

  • Accurate Record-keeping

You need to keep accurate and clear records of all your business transactions to make it easier for you to file your taxes and operate your business. You will have to keep track of all your receipts, invoices, bank records, and expenses. If you cannot do this yourself or hire a professional, there is software available that will help you with your financial records.

  • Getting a Business Bank Account

You should open a business bank account even though your business and personal assets will be taxed together as a sole trader or partner. Besides, a business bank account is critical if you are running a limited company, as limited companies are usually recognized as individual entities.

  • Business Insurance

You are required by law to have your business insured. The insurance you take out must be tailored to your industry and the type of business you are doing. Some business insurance schemes include public liability insurance, employee liability insurance, sole trader insurance, and professional indemnity insurance.

Typical self-employed Jobs

You can take different business routes as a self-employed individual, and we have highlighted a few of them below.

Personal Trainer

Personal trainers use their skills, knowledge, and expertise to help clients achieve their different goals through meal plans, exercise programs, and direct coaching. As a personal trainer, you can earn up to £60,000 or more, and it is a lucrative career for people who have a passion for health and fitness. You can also take some training courses to increase your eligibility and earning potential. Besides, with most of these Personal Training Qualification courses, you can start earning in 2-3 months.

Nutrition Adviser

A nutrition adviser is an individual that offers food-related advice to individuals, and this is not a career you can do without qualifications. You need to complete a Level 3 Nutrition course as an alternative to getting a university degree in nutrition. Also, nutritionists make an average salary of £26,000 yearly.

Sports Massage Therapist

Sports massage therapy is a lucrative career that is dedicated to improving the performance of both athletes and normal individuals. As a sports massage therapist, you can be a contractor for sports clubs and gyms or start your own business. However, you need to behave sports massage course qualifications to start this career path. Most Level 3 sports massage courses provide you with the skills and expertise needed to start your own sports massage business.

Pilates Teacher

According to payscale, Pilates teachers can earn up to £50k a year, and you need a Level 3 Diploma in Mat Pilates as an entry-level requirement. Once you have all your qualifications, you can start running Pilates classes in a gym or studio.

FAQs

  • Can I be self-employed and work for a company?

Yes, you can have a business on the side and still work full-time for a company. You will have to pay tax through Self Assessment and PAYE in this instance.

  • Can I apply for a mortgage as self-employed?

It can be challenging to get a mortgage if you are self-employed, but it is not impossible. When applying for a mortgage as someone who is self-employed, you’d need to submit business accounts and a coup of your Self Assessment tax return forms. This way, the mortgage lender can calculate how much they are willing to lend to you.

  • How do I register as self-employed?

Using your email address, you can register as self-employed with HMRC on the government’s online registration portal. You’d need to provide basic information like your business name, business start date, home address, National Insurance number, and business information. After registration, HMRC will send you a 10-digit Unique Taxpayer Reference, and they will also set up an online account for you.

  • What can I claim as self-employed?

You can claim different benefits if you are self-employed, like the self-employed allowable expenses, universal credit, tax credits, and self-employed grants.