Becoming self employed can be the biggest adventure of your life. You’ll be your own boss and everything you do will be in the interests of your own business. Let’s have a chat about what’s involved in becoming self employed in the UK.
You can watch the video about this subject here, or read on below:
So you’ve had a great business idea and want to turn it in to a real thing? You feel like you’re ready to take the plunge and officially become self employed? It’s not as scary as it sounds. Let’s see what’s involved.
Sole Trader vs Self Employed vs Limited Company
One of the first confusing things you might come across is the terminology used for being self employed. Don’t get hung up on this, to keep things really simple you’re generally going to follow one of two routes:
- Be Self Employed OR
- Set up a Limited Company
When you’re self employed you literally work for yourself. A ‘sole trader’ or ‘sole proprietor’ is just another name for a self employed person. That’s what we’re going to be talking about here.
On the other hand, having a limited company is a whole different ball game. A limited company (Company Name Ltd.) is a separate legal entity -- a bit like a different person. Even if you have your very own limited company you’re generally not self employed. Instead you’re an employee of your own company (normally). Just because it’s your company is irrelevant… legally the company is a separate ‘thing’. And yes, theoretically the company can sack you! Too bigger topic for this article but in a nutshell a limited company is owned by the shareholders but managed by the board of directors.
What is a self employed Partnership?
We should also briefly touch on ‘Partnerships’. You can be in a self employed partnership. You can have multiple business partners and you personally share responsibility for the overall business. Generally speaking you pay tax on an equal share of the business’ profits. You also have a nominated partner who does most of the tax and admin stuff. The partnership isn’t a separate legal entity though and for the minute we’ll not touch on limited partnerships and limited liability partnerships (LLPs) -- let’s keep things simple for now and assume you’re just going to be a self employed ‘sole trader’.
How do you become self employed in the UK?
So let’s assume you’re going to be a self employed sold trader. This is the most common and basic form of self employment. There are essentially 3 steps to becoming self employed in the UK:
- 1 -- Do work and get paid for it
- 2 -- Register with HMRC for self employment (self assessment)
- 3 -- Keep good accounting records
All of the above happen in parallel but it’s a good idea to verify you have a valid business before bothering to register with HMRC. Remember there’s now a trading allowance and, generally speaking, you don’t have to register at all if your turnover is under £1,000. So get things up and running, make sure it has legs, then worry about the admin stuff.
Also, remember there’s no formal register of self employed businesses in the UK -- you just need to register for ‘Self Assessment’. This basically tells HMRC you’re going to assess your own tax situation… yourself… self assessment! Self Assessment covers way more than just self employment -- it’s basically a catch-all for anyone with a nominally unusual tax situation. ‘Self Employed’ is one of many sections you can add to your Self Assessment Tax Return. Let’s not worry about that too much for the moment.
In terms of other stuff you really need to think about, too much for this article but you’ll almost certainly need to:
- Set up a business bank account
- Sort business insurance
- Get a good accountant!
How many self employed businesses can you have in the UK?
Technically the UK self assessment tax return system allows you to add up to five self employed businesses, however there’s no theoretical limit on how many self employments you can have. If you do run more than 5 distinct businesses you’re probably best contacting HMRC to ask them how they want this presented on a tax return.
Registering with HMRC for Self Employment
As briefly touched on above, you need to tell HMRC that you’re self employed so that they can send you a request to complete a Self Assessment tax return. I say ‘request’ but really it’s a demand and if you don’t do it you’ll go to prison… or at least get in a LOT of trouble from THE GOVERNMENT. So don’t just brush over this. To complete the process you will need:
- Business Name & Description
- Start Date
- E-mail Address
- Your National Insurance Number
- Your Personal Details (address, date of birth etc.)
Self Employed Business Name and Description
Don’t go overboard here. At this stage HMRC really don’t care that much and you’ll get the opportunity to correct this on your first tax return anyway. Even then… at the moment you’re limited to a maximum of 42 characters for your business description. So don’t get carried away! When it comes to choosing a business name it can essentially be anything you like -- even just your own name, and this is a safe bet if you haven’t decided on a name yet. Just remember:
- You’re not a limited company so you can’t include ‘limited’ or ‘ltd’ or ‘llp’ or ‘plc’ etc. as part of the business name, since you’re none of those things.
- The name can’t be offensive
- The name can’t be the same as an existing trademark
- The name can’t contain a ‘sensitive’ word or expression
- The name can’t suggest a connection with government or local authorities
Generally set this to the first date on which you made or spent any money relating to the business. BUT this is an important one to check with an accountant, especially if you plan on introducing personally owned assets to the business or items purchased long before you started trading.
Visit the ‘Set up as a sole trader‘ page on the HMRC web site and follow all the instructions on there. It’s relatively straight forward to complete this -- it shouldn’t take any longer than 10 minutes. You’ll then just need to wait for:
- Your UTR
- Your Government Gateway ID
- Your first Self Assessment request
What is a UTR?
You’ll see this term coming up quite a lot when you’re self employed and it’s important you know what it is. Your UTR is your Unique Tax Reference number. Everyone who needs to complete a self assessment tax return will be given a UTR by HMRC. It’s your UNIQUE reference number for taxes -- totally separate from your National Insurance number and your UTR will stick with your for your whole life. You can’t do anything with HMRC without a UTR so once you’ve been assigned one keep a record of it as you’re going to use it all the time. HMRC should send you one within a couple of months of registering for self assessment. If they don’t it might just come with your first request to complete a tax return. If in doubt, contact HMRC and ask them for it. You can also normally find it once you log on to your tax account using your new Government Gateway logon details.
When do I have to register to be self employed?
Don’t panic! The HMRC deadline to register for self assessment is 5th October for any untaxed income generated in the previous tax year. So for example:
- Self employed income received from 5th April 2019
- Register for self assessment by 5th October 2019
- Self employed income received from 6th April 2019
- Register for self assessment by 5th October 2020
This is since 6th April is the start of the new tax year! This page explains HMRC’s deadlines in a bit more detail.
When will I have to complete a tax return?
This is a very commonly asked question. You fill everything in and for months and months hear nothing. This is fairly normal. Generally you’ll receive a request to complete a tax return at the start of the NEXT tax year. So for example:
- Started trading: 10th April 2019
- Self Assessment request from HMRC: April / May 2020
- Tax return & tax due: January 31st 2021
So depending on when you started trading it could be almost 2 years before your tax return is due. If in doubt give HMRC a bell -- they’re generally very helpful.
Once you’ve registered for self assessment that’s it!
- Crack on and make lots of money
- Keep good accounting records
- Complete your annual tax return by the deadline (generally 31st Jan)
- Pay your tax and NI by the relevant deadlines (generally 31st Jan & 31st July)
Key HMRC Self Employment Dates
- 6th April to following 5th April: Self Assessment tax year
- 5th October: Deadline for self employment registration
- 31st January: Deadline for online tax return and first tax payment on account
- 31st July: Deadline for second tax payment on account
How do I register a second self employed business?
It’s very common for self employed folk to have more than once business and the good news is you don’t have to go through the registration process for each of them. You only register for self assessment once. Then, when it comes time to submit your tax return you just add extra self employed ‘sections’ to your return for each of your businesses. Here’s what it looks like on an actual tax return when I’m using my business name ‘Andy Mac Drums’:
I’d love to be kept up to date with progress of your self employed journey! Keep in touch over on Twitter @smallbusinesstb -- best of luck!