The leap from employment to self-employment is a big one. It can seem that you are entering uncharted waters – and many newly self-employed people feel that they are alone in their endeavours.
There is a range of tasks that must be completed by the newly self-employed, and a host of loose ends that must be tied. We have compiled a list of tips to help guide you through the process.
1. Make financial provisions
It is vitally important to remember that there will probably be a period immediately after leaving your job during which you may have no work. Most self-employed people do not immediately fall into revenue-generating work – and this can have dramatic implications for your financial position.
You should therefore make sure that you have set aside enough cash to tide you over before jumping into self-employment. The amount you need will obviously depend on your individual circumstances, but it is generally suggested that the newly self-employed should set aside at least two months worth of pay.
2. Get registered
Registration should be amongst your most important priorities as a newly self-employed person. You are legally obliged to register with HM Revenue and Customs within three months of becoming self-employed; failure to do so will result in a fine.
You can easily register over the phone, by calling the Newly Self-Employed Helpline on 0845 915 4515. You will need to provide your address, National Insurance number, and the exact date on which you became self-employed. The process takes around 10 minutes. You will then be sent a welcome pack, which includes a range of useful material – including a guide on tax for the self-employed.
3. Choose a legal structure
You will also need to choose a legal structure for your new venture. There is a range of options available on this front. While most newly self-employed people initially choose to operate as sole traders, you might instead decide to incorporate a limited company or establish a partnership. Your choice will depend on your own requirements, particularly regarding protection from legal liability.
Your choice of structure will have a significant impact on your legal and financial affairs in the future – so it is vital that you make the right decision. Seek professional advice if you are in any doubt.
4. Keep good records
You have a legal obligation to keep full and accurate records as a self-employed person. In practice, this means that you must keep details of all your income and business expenditure.
Aside from your statutory responsibility to keep these records, they will help you enormously when it comes to filling out your annual Self Assessment. If you are using bookkeeping software (which can be purchased very cheaply), completing your tax return will be as simple as pressing a button and copying the relevant numbers.
5. Get insured
Insurance is a vital but often overlooked necessity for the self-employed. Your insurance requirements will depend on the nature of your business – but you should remember that you may be legally obliged to purchase certain policies.
If you are employing anyone else, you are required to take out employers’ liability insurance. This will protect you against claims arising from injury or illness sustained by employees in the course of their work.
You should also consider taking out professional indemnity and public liability insurance – both of which can protect you from potentially costly claims.
6. Consider VAT
If you believe that your turnover will exceed the VAT registration threshold (currently set at £70,000) you must register for VAT. You can do this online through the HMRC website, or by requesting and returning form VAT1.
There are circumstances in which it may be beneficial to voluntarily register for VAT, even if you are not legally obliged to do so. You may wish to read our article on VAT registration, elsewhere in the Knowledge section, for more information on this.
7. Plan for retirement
By its very nature, self-employment does not offer the benefits enjoyed by employees. Amongst other things, this means that you will have to make your own plans to ensure that you are financially prepared for retirement.
You should consider setting up a personal pension to supplement the paltry sum that will be provided by the State Pension. Stakeholder pensions are a particularly popular option amongst the self-employed, and provide a cheap way to save for your retirement.
Self-employment is a big step, and is not something that should be entered into lightly. You should make sure that you are fully prepared before leaving the security of employment and setting up on your own. Remember, though, that working for yourself can be a hugely rewarding prospect – and is something for which many people strive. Good luck!