What to consider when becoming self-employed or a sole trader

Do you want to learn how to work for yourself? We’ve got some pointers for getting started, from considering the advantages and disadvantages of self-employment to understanding self-employment tax and benefits.

The most popular option is to become a sole trader.

According to the government, 76 percent of British businesses in 2020 will be sole traders (those that employ no one other than the owner), sole trader accounting for around 4.6 million out of a total of 6.0 million. The UK economy is driven by sole traders, also known as the “self-employed.” A sole trader is the sole proprietor of their company. What about the tax on sole traders? When you work as a sole trader, you pay tax on your profits and keep the rest after deducting any allowances and reliefs.

Should I start my own business?

There are numerous advantages to working for yourself. You can work more flexibly and ‘be your own boss.’ And, depending on your business, you may be able to charge a far greater rate than you could as an employee.

However, there are drawbacks to being self-employed, and there is a lot to consider when considering this option.

Is it right for me to be self-employed?

Being self-employed has advantages and disadvantages, and there are several factors to consider while deciding between self-employment and employment, including:

• Do you know how you’ll gain clients or customers?
• Do you have enough money to start your own business?
• Would you be able to make it through periods of low or no pay?
• Do you have confidence in your ability to manage your own business, such as managing cash flow, keeping accurate records, and filing tax returns?
• Have you considered the consequences of removing employee benefits such as vacation pay, sick pay, and employer pension contributions?

You’ll also have to consider personal factors such as whether you’d miss working with coworkers, whether you have enough space, and any upcoming life events such as moving home or having a baby.

What are the advantages of self-employed?

There are numerous advantages to being self-employed, and this list is by no means complete:

• You may find it easier to accommodate your work around other commitments and duties, such as childcare, because you have more flexibility and control.
• Your work may be more diversified because you may be working on multiple projects for various clients at any given moment.
• As you establish your own firm, you can explore your creative and entrepreneurial side.
• It’s more likely that you’ll work from home or from your own office.

There are numerous financial advantages to being self-employed. When determining your tax liability, you can deduct expenses like travel and some utility bills from your income.

Day rates for self-employed consultants and freelancers, on the other hand, are typically substantially higher than salaries, indicating that there is the opportunity to earn more money.

What are the drawbacks of being self-employed?

It’s also necessary to consider the drawbacks of being self-employed. There are some obstacles to overcome, such as:

• locating customers or a path to market
• start-up expenses
• bookkeeping and other administrative tasks
• observing industry regulations

You’ll also have to think about some of the downsides of working for yourself:

• Your income isn’t guaranteed, making it difficult to meet rent or mortgage payments, loan payments, and other living obligations.
• You are solely responsible for the company’s success or failure, therefore you don’t have much in the way of backup if things go wrong.
• If you take a vacation or are unable to work due to illness, you will not be compensated.
• Getting authorised for things like renting a home, getting a mortgage, or getting a loan can be more challenging.
• Separating your personal life from your professional life and achieving a decent work-life balance can be tough.
• If you work on your own a lot, being self-employed might be isolating.

Creating a Limited Liability Company

There are a few things you must do when forming a limited company, including registering with Companies House, drafting a memorandum of association, and paying corporation tax..

As a sole trader, you’re just getting started.

These are some of the things you’ll need to do if you’re intending to work for yourself in the UK as a lone trader:

• Inform HMRC that you are self-employed so that they are aware that you must file a Self Assessment tax return and pay Class 2 and 4 National Insurance premiums.
• establishing a business bank account – If you’re having trouble deciding on a provider, read our post for a list of the finest business bank accounts.
• Establish a system for recording your profits and evidence of your business expenses; this will make filing your HMRC tax return much easier.
• If you’re working from home, check your tenancy or mortgage agreement to make sure you’re not breaking any terms – you may need to alert your landlord or mortgage lender.
• Organise your insurance – The most common types of company insurance to consider are professional indemnity and public liability insurance, but there are lots of additional options as well.
• Consider your pension – since you won’t be contributing to a job pension any longer, it would be a good idea to set up a private pension to continue saving for retirement.

How can I register with HMRC as a self-employed person?

When you establish your own business, one of the first things you should do is register as self-employed with HMRC and set up as a sole trader.

How much will I have to pay in taxes as a self-employed person?

As a self-employed person, the amount of tax you’ll pay is determined by how much money you’ve made and the ‘allowable costs’ you’ve incurred in the course of your business. When computing your taxable profit, you can deduct some business-related expenses from your income.

For self-employed and employed workers, the tax-free personal allowance and tax bands are the same, so you can earn up to £12,500 before paying tax in 2020-21.

On income up to £50,000, you’ll pay the basic rate of income tax (20%). Income above £50,000 is taxed at a higher rate of 40%, while income over £150,000 is taxed at a higher rate of 45 percent.

Working for a firm while becoming self-employed

Of course, you may go part-time self-employed or have a side hustle while working for a firm the remainder of the week. This means you’re both self-employed and employed, and you’ll have to pay tax both through PAYE and Self Assessment.

You could be self-employed but only work for one company (for example, if you have a single significant client), but HMRC will want to make sure the company isn’t just calling you “self-employed” to avoid paying National Insurance contributions and providing you employment rights in this situation.

To be considered self-employed, you must be able to choose when and where you work, and you will normally be paid when you send out invoices. If you’re unsure, check the government website or see an accountant.

Getting a mortgage while self-employed

One of the downsides of being self-employed is that getting a mortgage can be more difficult, although it is still feasible.

When you apply for a mortgage and are employed, the lender will normally request paystubs and bank statements to verify your income. When you’re self-employed, you’ll almost always be required to supply business accounts, as well as a copy of your Self Assessment tax return forms.

Lenders often want two to three years of records, so if you’ve only recently started your own business, you might not be able to secure a mortgage.

The lender will usually assess how much they’re willing to offer you based on an average of your salary over the previous two or three years. They may also ask to examine other paperwork, such as company plans, to ensure they’re certain you’ll be able to make your mortgage payments.

As a self-employed person, what may I claim?

Allowable expenses for self-employed people

Business insurance, a portion of your electricity expenses if you work from home, office costs, stock, and certain business-related travel are among the items you can deduct from your income when calculating the taxable self-employed profit.

However, make sure you read the self-employed instructions on the government website carefully, because you might get into difficulty with HMRC if you deduct anything that isn’t a permitted expense or if you don’t have proof of the charge.

Benefits for self-employed people

Certain benefits may be available to you depending on a number of criteria. If you’re self-employed and don’t make a lot of money, you can qualify for income support or working tax credit, though the latter has mostly been replaced by Universal Credit.

For further information, go to the government’s website.

Credits for self-employed people

When you’re self-employed, you can claim Working Tax Credit, although the conditions were tightened in April 2015. Self-employed tax credit claimants must demonstrate that their self-employed job is organised, regular, and ongoing, and that they are functioning on a commercial basis with the goal of profit.

Housing Benefit for Self-Employed

Again, Universal Credit has taken its place. If you’re self-employed but not making a lot of money, and certain other criteria apply, you may still be eligible for Housing Benefit and a council tax reduction.

When determining your eligibility for benefits such as housing assistance, the council will most likely request your business records for the previous financial year, or a forecast if you haven’t started operating yet.

Self-employed Universal Credit (UC)

If you’re self-employed, you might be eligible for Universal Credit. At the end of each monthly assessment period, you must disclose your earnings and provide details of any payments into or out of your business. Your job coach will also request client and supplier records, as well as marketing materials.

Your Universal Credit payments may be computed using the Minimum Income Floor, which is based on your expected earnings. If you’re in your first year of self-employment, however, a different method may be utilised because the Minimum Income Floor may not apply. You may also be eligible to meetings with a work coach who is specifically trained in self-employment throughout this time.

Grants for self-employed people

If you’re intending to be self-employed, you might be eligible for a government subsidy called the New Enterprise Allowance. If you or your spouse has received Jobseeker’s Allowance or Employment and Support Allowance, or if you’ve received income support, or if you’re a lone parent, unwell, or disabled, you may be eligible.

If your firm is approved, you might get a weekly allowance of up to £1,274 over 26 weeks if your application is approved. You can also seek for a loan to assist with the funding of your business.

Other small company awards are available from the government, municipal governments, the EU, and other organisations. Check out the government’s financing finder tool to see whether you qualify for any grants.

RELATED: What business expenses can a Sole Trader claim?