For many people, the first step to starting a business of their own is to become self-employed. This can be a fairly straightforward process but you need to get it right in order to avoid any complications later on as your business grows and develops. Here we set out your first steps.
How to become self-employed
The first thing you have to do when you become self-employed is to notify HMRC. However, the process of notification differs depending on your business structure. See our guide to deciding a business structure.
The simplest way to start is to become a sole trader. To do this, you must complete a registration form CWF1 and send it to HMRC within three months of your starting to trade. Take note that there are penalties for late registration.
As a sole trader, you will automatically be liable to pay Class 2 NICs at the current rate of £2.40 a week. Class 2 NICs are collected monthly or quarterly, usually by direct debit. If your profits in any tax year are below £5,075 you can apply for an exemption from Class 2 NICs; however, you may wish to continue paying them as this will ensure that your future state pension and other state benefits are not affected.
Once self-employed, you will be responsible for calculating your profits for tax purposes and for making tax payments. To find out more, see our guide to tax for the self-employed.
Practical steps towards self-employment
Even if you decide that you do not want to operate as a limited company, you should consider registering a dormant company. This will protect the business name for the future.
You do not have to open a business account as a sole trader, but it is advisable. It is better to organise your personal funds separately and for cheques and transactions to be processed through an account in your business name.
You should consider the amount of expenses that you will be able to deduct from your taxable profits. See our guide to business expenses. Keep all of your business records from the day you start incurring costs. Most pre-trading expenses can be deducted from taxable profits when you open for business.
You will also be able to deduct the cost of capital items, such as cars and equipment, although special rules apply. In particular there is now an annual investment allowance of up to £50,000, which is beneficial for small businesses. See our guide to capital allowances for more information.
If you have formed a limited company, there are different ways in which you can extract your profits. Useful information is contained in our manual on whether to take profits as dividends or a salary.
You may need to register for VAT if you expect your turnover in the first twelve months to exceed the VAT threshold. This could be the case if you have a contract in place. However, even if you are not required to register for VAT you may consider doing so voluntarily since there could be a tax advantage.
Unlike employment, tax is not deducted from self-employed income before it is paid to you. You should therefore consider saving some of what you earn so that you have sufficient cash to pay your tax and national insurance liabilities when they are due.
What to do next
We would like to help you to get your business off the ground and to improve its chances of success. We provide a range of services to help small businesses including tax advice, accounting software selection and training, accounts preparation, payroll and VAT services.
Contact us for a free, initial consultation to see how we can help you to achieve your goal of becoming self-employed.
