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Self-Employed
Do you have an entrepreneurial spirit?
Are you an aspiring entrepreneur eager to work for yourself? There are several factors to consider before going self-employed. Firstly, you need to determine which business structure is best for you. You can work as a self-employed individual (sole trader), work through a limited company, or if there are two or more of you in business together, a partnership may be a good option.
Business structure
Self-employed
A self-employed individual or sole trader, you must register with HMRC if you earn more than £1,000 in a tax year. Self-employed individuals pay income tax and national insurance contributions on their net income or profits, via an annual self assessment tax return. You need to submit your annual tax return and pay any tax owed to HMRC by January 31st of the following tax year. For example, self assessment tax returns for the tax year April 6, 2023 to April 5, 2024 must be filed with HMRC by January 31, 2025.
Your net income (income less expenses) is taxable at the applicable tax rate after deducting your personal allowance. Class 4 national insurance (NI) of 6% is payable on profits between £12,570 and £50,270. Profits over £50,270 incur NI of 2%. Self-employed individuals with income of less than £6,275 can pay voluntary class 2 contributions of £3.45 per week to maintain their right to certain state benefits. Self-employed individuals must keep business records with details of income and expenses. Self-employed individuals are personally liable for the debts of their businesses.
Limited Company
Limited companies must register with Companies House and HMRC for corporation tax. Companies must submit an annual return and file annual financial accounts with Companies House. Companies pay corporation tax and submit an annual tax return to HMRC. Limited companies pay corporation tax on their net profits (income less expenses). From April 2023 the corporation tax rate is between 19% and 25% depending on net profits. Companies with net profits below £50,000 will pay 19% corporation tax. It is advisable to use the services of an accountant to prepare your financial accounts and calculate tax owing.
A limited company is a separate legal entity limited by shares. As the owner and director of the company, you are a shareholder, and you can pay yourself with a mix of salary and dividends. Limited companies pay corporation tax. The remaining profits after corporation tax are available for dividend payments. You can also leave profits after corporation tax in the company as reserves. The company is liable for the debts of the business, not the owner.
Partnerships
A partnership may be appropriate where there are two or more of you working in the business. All partners share responsibility for the business, including all bills and any losses. Partners have a share of the profits and pay income tax on their profits via a self assessment tax return. A nominated partner will be responsible for submitting the partnership’s tax return and maintaining the business records. Partnerships must be registered with HMRC.
Partnerships can be limited partnerships and must be registered with Companies House. Limited partnerships must have one general partner and at least one limited partner. All partners pay income tax on their share of the profits through self assessment tax returns. More details about partnerships are available on the gov.uk website.
Set up a business partnership: Setting up – GOV.UK (www.gov.uk)
To learn more about tax for self-employed people and limited companies, click on the link:
VAT – value added tax
Whichever business structure you choose for your business, you may need to register for VAT with HMRC. You will need to register for VAT if your turnover exceeds £90,000 in the last 12 months or if you expect it to exceed £90,000 in the next 30 days. VAT registered businesses charge output tax on the goods and services they sell. Input tax is the VAT you pay on goods and services you purchase for running your business. On the VAT return, you reclaim the input tax and offset this against the output tax owing to HMRC. Vat returns are usually submitted to HMRC every 3 months.
To illustrate how VAT works, if you buy materials to make your product costing £100 plus VAT, you pay a total of £120. You make your product and sell it for £150 plus VAT of £30, selling the item for £180. On the VAT return, the input tax is £20 and the output tax is £30. Deduct the input tax of £20 from the output tax of £30. The balance of £10 is paid to HMRC.
VAT returns are submitted digitally to HMRC under MTD or making tax digital, which requires an accounting software package.
Some business terms
Turnover or Sales is the total sales value (selling price) of the goods or services you have sold.
Cost of Sales is the cost of producing the goods and includes the cost of the raw materials and other costs that are directly attributable to the production of the goods.
Gross Profit is turnover or sales less the cost of sales.
Operating Expenses are the general running costs of the business, such as salaries, rent, stationery, electricity, water, etc.
Net Profit is gross profit minus operating costs or sales minus cost of sales minus operating expenses.
Fixed Costs are costs that do not change with an increase or decrease in the number of goods produced. Fixed costs are longer term costs that a company is committed to paying, such as rent.
Variable Costs are costs that do increase or decrease with changes in production levels, such as raw material costs.
Financial Statements: The two main financial statements are the Balance Sheet and the Profit and Loss Statement. The Balance Sheet is a statement of the assets, liabilities, and equity of the company at a point in time. The equity of a company is the assets of the company less the liabilities. A Profit and Loss report details the income and expenditure for a specific period.
Other aspects of running a business
Sales, marketing & supply chain
- Sales – determine your target market and product offering
- Marketing – digital marketing and traditional marketing
- Supply chain – how you procure raw materials for your products and distribute finished goods
- Managing a website and e-commerce
Administration & finance
- Business insurance, commercial, and professional indemnity insurance for contractors
- Payroll, pension contributions, employment contracts, and other HR (Human resources)
- GDPR – General Data Protection Regulation – rules on how you gather, use, store, and manage personal data
- Health and safety in the workplace
- Accounting and finance
- Information technology and security
Other resources
If you would like to learn more about running a business or working for yourself, take a look at our sister website, Tyro Business: