Going self‑employed: everything you need to know

The pros and cons of self-employment

The benefits of self-employment

There are plenty of benefits to going self-employed. Here are some of the heaviest hitters:

• Freedom – You're your own boss, meaning you get to run your business exactly as you see fit. No more following orders or having someone telling you what to do. Plus, you get to set working hours to fit around your life.
• More money – Self-employed rates tend to be higher than salaries paid by employees, which means you could potentially earn more money by going it alone.
• Variety – You could be working on a lot of different projects for various clients at once. Not only could this help your working days pass by more quickly, the fast pace could help you learn new skills and build up experience to develop an impressive CV.
• You choose your workplace – Counting on cutting out your commute or looking to surround yourself with other inspiring self-employed people? As a self-employed worker, you get to choose where your business is based.
• Tax benefits – Self-employed workers have access to benefits, allowances and reliefs that can help them reduce their tax bills. This includes utilities bills, travel costs (bus tickets and fuel) and marketing and advertising expenses.
• You're doing something you love – When you set out on business on your own, it's likely that you're doing something you love. And if you're passionate about your work, then work will feel less like work and more like fun.

The disadvantages of self-employment

Despite the positives, there are disadvantages to being self-employed too. Here's some negatives to consider:

• Less job security – It's your responsibility to ensure you've got a steady stream of work on the horizon so that you've got a reliable income arriving regularly. It can be stressful to make money stretch during quieter periods, especially when you've got rent, a mortgage or other living expenses to pay.  
• No employee benefits – As a self-employed worker, you don't get to enjoy employee benefits such as a company car, employer pension contributions, gym memberships, or paid holidays or sick leave.
• Bookkeeping can be taxing – You need to take care of your National Insurance contributions and your business's financial records as well as filing a self-assessment tax return. Balancing the books can be time-consuming, especially when you're already busy enough taking care of business.
• Everything lies on your shoulders – You bear the brunt of the responsibility for all of your business's failures and successes. If things go well, you can give yourself a well-deserved pat on the back. But if things go wrong, the onus is completely on you.
• Starting up can be tough – From business insurance and marketing to office equipment and stock, start-up costs can be expensive. Not only will you need to have a good amount of money behind you, you'll need to invest loads of your blood, sweat and tears to get your business off the ground.
• Separating work and home life can be tricky – When you're investing so much time into your business's success it can be difficult to maintain a healthy work-life balance.

How to set up as self-employed

By reading this guide, chances are that you've decided the positives of going self-employed far outweigh the negatives. Well done on taking your first big decisive step!

Now it's time to begin setting up as self-employed. Below, we've listed the most important hoops you'll need to jump through to make your entry into self-employment official.

1. Let HMRC know you're self employed

You need to tell HMRC as soon as you become self-employed. This is arguably the most important step to take when going self-employed, as you're giving HMRC a heads up that you'll be paying tax through Self Assessment and Class 2 and 4 National Insurance rather than PAYE.

You have until 5 October in your business's second tax year to register as self-employed with HMRC. The tax year runs from 6 April one year to 5 April the next. For example, if you started your business in May 2019, you'd need to register with HMRC by 5 October 2020.

Failing to let HMRC know in time could result in a fine, so the sooner you register as self-employed, the better.

2. Decide on a business structure

When going self-employed, you need to decide how you want your business to operate.

But whether you’re weighing up if you should go it alone as a sole trader, limited company or as part of a partnership, you want to ensure you've made the right decision – especially as the business structure you choose can impact how you pay tax and recordkeeping.

To help you make the best choice for you, below are some simple definitions of the business structures available to you when going self-employed.

• Partnership – This structure tends to be favoured by professional services businesses like accountancy or legal firms. The partnership is owned by partners who fund the business together. Each partner works as a self-employed worker, but all are responsible for the business's profits and success. Under this structure each partner will pay tax and National Insurance by submitting a self-assessment tax return.
• Limited company – A limited company has its own separate legal identity from the business owner. The individual who forms the limited company will serve as its director and is responsible for the business's legal and financial decisions. However, the business's assets and liabilities remain completely separate from the business owner's finances.
• Limited liability partnership – This follows the same founding principles as the limited company partnership. However, the main difference with this business structure is that partners aren't responsible for the debts that the partnership incurs.
• Sole trader – Sole traders are the sole owners of a business. This means that there's no legal distinction between the business owner and the business itself. This means that owners can keep any profits after tax and are personally responsible for any losses that the business makes.

Take a read of AXA's guide to running a business as a sole trader and limited company to learn more about the ins and outs of some of these business structures.

3. Set up a business bank account

It's vital that you keep your business's finances separate from your personal income. This well help you keep a closer eye on the money entering and leaving your business and make tallying under your end of year finances for HMRC much easier. Plus, you don't want to get your own pocket money tangled up with your business's.

An easy way to separate your personal and business finances is to set up a business bank account. And with business account fees ranging from free to £12 per month (plus transaction fees) it's a relatively inexpensive way to stay organised.

Here's the details and documents you'll need to have at hand to open a business bank account:

• Proof of ID (such as a passport or photo driving licence) for all named business owners or named company directors
• Proof of address (such as a bank statement or utility bill)
• Proof of business address
• Estimated annual turnover
• Contact details
• Companies House Registration (if you run your business as a limited company or partnership)

To ensure you're getting the most bang for your buck when searching for a business account, look for perks and services, such as fee-free introductory periods, apps and low charges.

4. Begin bookkeeping

Once you've got a business account sorted, it's time to start tracking your business's incomings, outgoings and expenses.

Keeping impeccably ordered records and constantly updated them will make submitting your tax returns a breeze and can show potential investors that you take your business's finances seriously. Plus, bookkeeping can help you plan for the financial year ahead and whether it's time to make the next move to grow your business.

Below are some steps to take to make balancing your business's books easy:

• Start early – The quicker you get on top of your bookkeeping, the less stressed you'll be come tax deadlines. Set aside a few minutes every day or a specific time in the week to dedicate to making sure things add up.
• Always keep receipts – Store records of business expenses so that you're prepared if HMRC ever check in on your finances. Consider using apps like Expensify or take photos of receipts on your phone and upload them to free online storage like Google Drive for ease of access.
• Use debit or credit cards to record transactions – This will help you keep track of where, when and how much money you spent, helping to make tracking expenses and knowing what you can claim back as business expenses easier.
• Get extra help – Finding tracking your business's finances too taxing and time-consuming? Don't panic, there's plenty of help out there. Why not invest in an accountant or download accounting software to help make crunching the numbers less taxing?

5. Alert your landlord or mortgage lender

Planning to run your business from home? Then you'll need to check your tenancy agreement or mortgage agreement to make sure you're not accidentally breaching any of its terms.

If you’re renting and your landlord doesn't have a problem with you running a business from home, make sure you get the tenancy agreement updated to reflect this change in circumstances.

More often than not, residential mortgages tend to prohibit running a business from home, so you'll need to speak to your lender for permission before beginning work – especially as breaching the terms could lead to costly consequences.

If you plan on altering your home to make room for your business, you'll need planning permission. And, depending on the nature of your business, you might have to apply to your local council for business licences cover the activities of your working day.

6. Get self-employed business insurance

Followed the steps above? Your life as a self-employed worker is almost about to begin!

But before you go flexing your skillset to woo potential new clients and customers, it's a good idea to get business insurance in place for added protection.

From a client injuring themselves when visiting your premises to flood damage to your stock, it's good to have back up when disaster strikes. Think of business insurance as a safety net for those times when things take a turn for the worse.

Whether you're on the lookout for professional indemnity insurance, public liability insurance or employers' liability insurance, AXA has you covered.

And don't worry if you're feeling baffled when it comes to knowing what protection your business needs. Pay a visit to our Business Insurance Wizard and let it work its magic to find the cover that's the right fit for your business.

What tax do I pay if I'm self-employed and how do I pay it?

Self Assessment deadlines for the self-employed

When you're self-employed, it's up to you to make sure your tax and National Insurance contributions are paid on time. You'll pay these by submitting a Self Assessment tax return for the previous tax year.

To do this, you must register for Self Assessment with HMRC by the 5 October of your business's second tax year at the very latest.

So if you started your business in July 2019, you have until 5 October 2020 to register for Self Assessment. You'll have until 31 October 2020 to your submit paper tax return or 31 January 2021 to submit your online tax return.

What self-employed taxes do I need to pay?

As a self-employed worker, you'll pay income tax on your business's profits and National Insurance contributions to HMRC at the end of each tax year. To do this, you have to declare your business's total income and expenses by submitting a Self Assessment tax return.

The total amount of tax you'll pay depends on how much money you've earned in the year. You'll also be able to subtract allowable expenses (such as council tax and utility bills) you've accrued in the running of your business from your income when tallying up your taxable profit.

HMRC will then get in touch to let you know how much tax and National Insurance you need to pay.

The tax-free personal allowance and tax bands for self-employed workers are the same as those for employed people.

Personal Allowance and basic rate limits 2019-20 & 2020-21

Rate	2019-20 & 2020-21
Personal allowance: 0%	You'll pay no income tax on profits up to £12,500.
Basic rate: 20%	You'll pay 20% tax on profits between £12,501 -£50,000.
Higher rate: 40%	You'll pay 40% tax on profits between £50,001 -£150,000.
Additional rate: 45%	You'll pay 45% tax on profits over £150,000.

If you’re operating a limited company or limited liability partnership, you'll also need to pay Corporation Tax on any profits your business makes. You'll likely need to submit a Self Assessment for any of the money you earn as personal income through your business.

Going self-employed on the side while working for a company the rest of the week? This means that you'll be both self-employed and employed, so you'll pay tax through Pay As You Earn (PAYE) and Self Assessment.

Do I pay National Insurance when I'm self-employed?

You may have to pay two types of National Insurance when you're self-employed:

• Class 2 NICs – You'll pay this if you earn profits of £6365 or more a year. If this applies to you, you'll pay £3 a week in National Insurance contributions in the 2019/20 tax year.
• Class 4 NICs – You'll pay this if you earn profits of £8632 or more a year. If this applies to you, you'll pay 9% on profits between £8632 and £50,000 and 2% on profits over £50,000 in National Insurance contributions in the 2019/20 tax year.

Can I be fined if I don't pay self-employed tax?

When you start working as self-employed, you must register with HMRC.

If you need to submit a tax return and miss the deadline, you'll get a penalty of £100. You'll have to pay more if it's late, so, for the sake of your finances, make sure to submit your Self Assessment tax return on time.

Do I pay VAT when I’m self-employed?

Effective since April 2018, if your business earns £85,000 or above in annual turnover you need to register your business for VAT. This rule is applicable at all stages of the business year.

For example, if you forecast that you're not going to reach the £85,000 limit within the year, but your business booms and you surpass this threshold within 12 months, you need to let HMRC within 30 days of this happening.

Fail to let them know in time and you could be slapped with penalties from HMRC.

Even if you know that your business's annual turnover isn't going to exceed £85,000 within 12 months, you can still decide to register for VAT. This could be useful if you plan to claim VAT back on certain business purchases, such as office equipment.

In April 2019, HMRC introduced Making Tax Digital, which is designed to make recording, storing and submitting business' tax affairs easier. Read AXA's Guide to Making Tax Digital to find out how it could benefit your business here.

What can I claim for as self-employed?

Allowable expenses for the self-employed

As a self-employed worker, you can claim business-related expenses – such as broadband, council tax and utility bills – and subtract them from your income when totalling up your business's taxable profit.

This can help ensure that you're recording your business's profits accurately and will hopefully prevent you from accidentally forking out too much on tax payments.

In an ideal world it would be much gentler on your wallet if you could deduct all expenses from your business's profits. However, HMRC has strict rules on what you can and can't claim for, meaning you can only claim for costs incurred through the running of your business.

Click here to read AXA's comprehensive guide to what you can and can't claim as allowable expenses.

Benefits you could claim while self-employed

When you’re self-employed, you're still entitled to a number of benefits. From Jobseeker's Allowance to Universal Credit, we've listed a few self-employed benefits to look out for to give your finances an extra helping hand.

New Enterprise Allowance

The New Enterprise Allowance could provide you with the money, support and advice to help you when you're starting out as self-employed or if you're looking to develop your business further.

You could be eligible if you're over 18 and either:

• You or your partner get Universal Credit, Jobseeker's Allowance or Employment and Support Allowance
• You get Income Support and you're a lone parent, sick or disabled

If you're successful, you'll get a mentor who'll help you start up your business and begin to trade. Once you've established a business plan that your mentor has approved, you may get a weekly allowance worth up to £1274 over 26 weeks and can apply for a loan to help with start-up costs.

To find out if you're eligible for New Enterprise Allowance, get in touch with your Jobcentre Plus work coach. 

Universal Credit

Depending on how much money your business makes, you could be eligible for Universal Credit. This has replaced the following legacy benefits:

• Income-based Jobseeker's Allowance
• Housing Benefit
• Child Tax Credit
• Income Support
• Working Tax Credit

Most people can no longer claim for the above benefits, but if you're self-employed and already getting the benefits to be replaced by Universal Credit, you don't have to do anything just yet. The Department for Work and Pensions will get in touch to let you know when it's time to start claiming Universal Credit.

To start claiming Universal Credit you'll need to attend a gateway interview at your local Jobcentre Plus office so that the Department for Work and Pensions can decide whether your work can be deemed as "gainful self-employment".

As part of the gateway interview, you'll be asked to provide the following evidence:

• Your business plan
• Copies of invoices and receipts
• Trading accounts from the previous year
• Proof that you're registered as self-employed with HMRC

If you fail to provide enough evidence, the assessor could decide that you're not gainfully self-employed, meaning you'll need to actively look and be available for other work while you're getting Universal Credit.

If you move onto Universal Credit and have been self-employed for 12 months or more, the Department for Work and Pensions will calculate your payment based on the minimum income floor. This is the amount the DWP uses to set your Universal Credit payment each month.

If you've been self-employed for less than a year, you could be classed as being in the start up period, meaning the minimum income floor won't apply to you for 12 months.

You'll still need to attend quarterly interview at your local Jobcentre Plus to prove that you're gainfully employed but you can also get access to a work coach to provide you with support throughout your first year of business.  

Self-employed grants and funding

There are plenty of self-employed grants and funding opportunities out there to help get self-employed workers off the ground. Here's a few to keep an eye out for:  

The Prince's Trust – If you're aged 18 to 30, unemployed or working less than 16 hours a week, you can apply for grants between £1000 to £5000. You won't be able to apply if you've graduated with an undergraduate degree within six months of applying or if you have a postgraduate degree or professional qualification.

Startup Loan – Looking to grow your business? Then you could apply for a government-backed personal loan of up to £100,000 through Start Up Loans. You'll need to pitch your business plan to successfully gain funding and you'll need to pay back the amount you're awarded within five years.  

Local authority startup schemes – A lot of local authorities run schemes aimed at helping self-employed businesses get on their feet. Search for schemes in your neck of the woods using the government's Business Finance and Support Finder.

How can I keep on top of accounting when self-employed?

When you're self-employed, you're responsible for every aspect of your business. So, when it comes to ensuring your business is ticking over like a well-oiled machine, you need to make sure you're managing your time as effectively as you can.

Time is precious as a business owner and, when it comes to accounting for the self-employed, you don't have a spare second to spend struggling to make your business's sums add up. Bookkeeping can sometimes feel like a necessary (and sometimes mind-numbing) evil, but it's vital to your business's livelihood.

Keep records

Make sure you keep a record of every invoice, receipt and cheque you receive. That way you'll have information on the dates and reason for money entering and leaving your business.

Always, always, always update your accounts when invoices are paid and split them into the following categories to stay hyper-organised:

• Sales paid
• Sales unpaid
• Purchase paid
• Purchase unpaid

Paper receipts can be lost or worn out easily, so it's a good idea to scan them as a backup. A good tactic is to take a picture of them, upload them to Google Drive or Dropbox and clearly label what they are and when they're saved. This way, you can rest a little easier if HMRC coming knocking to see receipts.

Establish an invoice routine

You need to decide on payment terms to maintain a steady cashflow. If you leave it too long, you could be left strapped for cash, so choose a payment turnaround time that will see clients paying you sooner rather than later.

Some people like to work through invoices and taxes as they come in so that they've got income arriving throughout the month. Alternatively, others may set aside a specific day at the end of month to do dedicate purely to invoicing and accounting.

Why not consider setting clear terms and fees in your contracts and invoices? That way, you'll know when to expect bills. Plus, if clients submit after a deadline, you could implement late fees or introduce early payment discounts to incentivise clients paying you quicker.

However you prefer to work, establishing a proper routine for your invoices will make it far less time-consuming and help you keep on top of things.

Don't leave everything to the last minute

When it comes to working through your business's invoices, it's important that you don't leave managing your invoices and taxes until the eleventh hour. Haste makes waste and you're much more likely to make mistakes when you're frantically trying to get something out the door before a deadline hits.

Instead, you should set aside time making sure the information you submit – whether it's to your accountant or the taxman – is as accurate as possible. This means finding the state of flow that works for you.

Don't put off until tomorrow what you can get done and dusted today – you'll thank yourself later.

Keep your accounts digital

With Making Tax Digital on the horizon, it'll soon be mandatory for all businesses to maintain and store digital records. This means it's time to get shot of pen and paper in favour of digital bookkeeping software.

However, don't feel like you have to invest in fancy software. Excel and Google Sheets are perfectly functional ways to track the money entering and leaving your business. Plus, you'll be able to access and track these documents from the palm of your hand, wherever you are.

Take a read of AXA's guide to accountancy software and Making Tax Digital to help make recording expenses, tracking business mileage and invoicing clients easier.  

Get professional help

If keeping your business's books in good working order is leaving you stressed, it's probably time to call in the professionals by investing in an accountant to manage your self-employed finances.

Not only could this leave you with more time to spend on improving the services you provide your customers, having a professional taking care of the numbers could give you extra peace of mind knowing that your mountains of invoices are taken care of meticulously.

How to grow your business

Now that you're fully set up as self-employed, it's time to roll up your sleeves and get to work. There's no time to be shy – it's up to you to shout about the services that you can offer potential clients and customers and, most importantly, why you're a cut above anything that your rivals can offer.

But when you're just starting out, it can be difficult to know where to begin sowing seeds to help your business flourish. That's why we've rounded up some top tips on how to grow a business.

Create a customer loyalty program

Introducing a customer loyalty scheme could help you retain your most loyal customers. To show your frequent customers that you appreciate their custom, make sure that they're the first to be offered discounts, promotions or other loyalty awards on the services and goods you provide.

Not only could this encourage your most loyal shoppers to spend more money with your business –and distract them from rival offerings – it'll increase the chances of them raving about your business to their friends and family. This residual word of mouth could really help increase awareness of your business.  

For more tips on this issue, read AXA's guide to capturing customer loyalty.

Keep an eye on your competition

Researching your competition is key to differentiating your business from its rival. Not only can keeping a keen eye on your competition help you switch up your strategy, you can use it to swoop in on missed opportunities that they're not currently taking advantage of. This means that you can start offering your customers services and products that they can't.

Keep an eye on social media feedback and see if you capitalise on any customer pain points by delivering a better service. Do they advertise in the local press or on specific websites? Opt for the same tactics but see how you can create more impactful messaging to lure customers your way. And always maintain an analytical eye.

Make the most of social media

Although advertising in local newspapers, magazines and websites are all worth their weight in gold, social media is one of the most powerful tools you have in your advertising arsenal.

Advertising on social media is an extremely easy way to share your business's message to hundreds of thousands of people at once for prices that won't do too much damage to your wallet. Plus, by ensuring you stay engaged on social media, customer feedback can help improve on what your business currently offers and allow you to explore new opportunities to meet the needs of your consumers. This is a really simple way of making your customers feel heard.

For more savvy tips on how to make the most of your business's social media strategy, read AXA's complete guide to social media for businesses.

Share customer testimonials

Always ask customers to leave feedback on their experience of the services and goods your business provides. Showcasing authentic customer reviews can add to your business's credibility and better attract the interest of potential customers who are interested in what your business provides. Why not share glowing customer testimonials on your business's social media channels, website or print advertising? Doing so could reinforce the high standards your business has and help increase word of mouth.

Network

Being self-employed can be a lonely business, but you should never operate in isolation. Get yourself out there by attending networking events to meet like-minded business owners in your industry or in your local industry.

Networking is a great opportunity to learn tricks of the trade from other entrepreneurs and connect with customers and investors who can help build you business. Who knows, it might introduce you to your next big client or fruitful team-up with a neighbouring business.

Take the nerves out of networking by reading our guide on how to network like a pro.

How to stay motivated when self-employed

No matter how strong your work ethic, the number of plates you have to keep spinning when you're self-employed can leave you feeling burnt out and demotivated. It's important to go easy on yourself and recognise the signs of when it might be time to take things down a notch. Because when you're running on empty, you're not working at your best.

Here, we've listed some easy ways you can take stock, maintain motivation levels and keep your batteries charged as you navigate the ups and downs of self-employment and reach your business goals.

Always a have a plan

Regardless if it's short term or long term, having grand plans in place will help you tick off the everyday objectives that lead to your overall business goals.

An easy way to do this is to block out chunks of time for specific tasks, whether through to-do lists or daily plans. This way you'll be able to prioritise your time to complete the most pressing tasks and it'll help ensure that you're not taking on too heavy a workload. Plus, there's nothing more rewarding than crossing off achievements from your to-do list at the end of a hard day's work.

Read our guide to staying organised to help keep your business's plans ticking over like clockwork.

Break targets down

Being self-employed is packed with plenty of exciting moments (like bagging new clients) and loads of boring but necessary lulls (like doing your taxes). It's only natural that you'll want to race through some tasks and struggle to get through others.

That's why it's a good idea to break down the more labour intensive or unappealing tasks into digestible mouthfuls. That way you can work your way through tasks bit by bit at a set time each day instead of trying to tackle a heavy-going task in a oner.

Accept that things will go wrong

It's admirable to strive for perfection when you're self-employed, but no matter how organised or on top of things you are, it's highly likely that not everything will work out as you planned.

If something does go wrong, the best thing to do is not let it get you down. Nobody's perfect and making mistakes is the best way to learn to avoid the tactics that got you in a mess in the first place. So, if you've tried out a new tactic that hasn't worked out, don't sweat it. Pick yourself up, dust yourself off and heed the lessons you've learned to keep improving your business.

Find that you fear failure? Read our article on how some of the world's biggest brands bounced back from embarrassing blunders to see what lessons you can learn. 

Reward yourself

All work and no play is no fun for anyone. And if you don't allow yourself any downtime when self-employed, your motivation and energy levels will plummet eventually, which is no good when you're the sole driving force behind your business.

It's so important to take time out to focus on yourself and spend time with friends and family, because the act of coming back to your work after a rest can actually boost productivity.

So, if you've completed a job for a customer that you've been working on for months or finished a simple but boring task, make sure to reward yourself – whether it's a night out with friends or a treat from the high street. That way you'll create a positive association between working hard and nice things and give yourself the creative space to come up with your next big idea.

Pick a schedule that suits you

We've all got 24 hours in the day, but it's what you do with those precious hours that counts. As a business owner, hitting those all-important targets is vital, but it isn't the be-all and end-all. You need to ensure you're managing your time in a way that balances your work and home life commitments healthily.

Make sure that you build breaks into your day and set core working hours so that you know when to switch off from your work mode mentality to make time for some relaxation.

And whatever you do, try not to take on too much. It's ok to say no when your days are packed and being busy doesn't always mean that you're being productive. It's better to take on a few projects that you can manage to the best of your ability, rather than phoning things in to get them out the door.

Being self-employed is tough, so don't forget to be gentle on yourself by taking breaks.