So you want to be your own boss?
Increasing numbers of people are choosing to be self-employed, from sole traders and entrepreneurs to those extending their careers as they seek to work past retirement age. However, self-employment is a completely different experience to being employed and requires good planning and organisation.
Some key considerations to making a success of self-employment are set below. Among the basics are:
- Self-employed or corporate? You may find that it would be worth setting up a company rather than trading as a self-employed person, depending on a variety of factors.
- Cash flow A business may be profitable, but still run out of cash. You will have to keep on top of customer payments and that can be challenging.
- High overheads can cause many businesses to fail, particularly where your income fluctuates.
- Holidays and sickness mean no income, so calculate how much time it would take to earn the full year’s income you need. Look at income protection and critical illness insurance and private medical insurance may be advisable.
Year end and tax payments
Your choice of year end is important. You may find it simplest to use the tax year end –usually 31 March or 5 April. You can opt for another date, but bear in mind that there may be implications for your tax payments in the early years of your business.
Not setting enough aside for tax payments can catch you out, especially early on. For example, say you start a business on 6 April 2020, preparing your first accounts to 5 April 2021. The income tax and NICs for the whole year will be due on 31 January 2022, plus possibly another 50% payment on account for the following year.
It’s helpful to save a regular amount to fund tax liabilities, while having your accounts prepared as soon after your year-end as possible gives you maximum advance warning of future liabilities. Depending on the level of tax allowances available, most equipment purchases will effectively be treated as an expense, with tax relief given in the year of purchase. So it’s a good idea to make any purchases just before your year-end.
If you take on workers, you will need to register with HMRC as an employer and run payroll software that reports PAYE information each pay day. You will also have to comply with national minimum wage legislation and contribute to a workplace pension.
VAT registration is compulsory if your annual taxable turnover exceeds £85,000, but it can be worth registering voluntarily if your sales are zero-rated or your customers are VAT registered. In both cases, you should be able to recover VAT on purchases and expenses without any impact on sales.
And don’t forget your pension. Paying NICs of just £156 a year will entitle you to the state pension, so you should pay these voluntarily if your profits are too low for compulsory contributions. This depends on whether you already have the 35 years of contributions needed for the full state pension – you can check using your HMRC personal tax account.
This list is not exhaustive and there are many other things to consider, such as whether to trade as a limited company. Please get in touch with us for a full discussion of your options.