Wondering how to become self-employed? We’ve got some tips for getting started – from weighing up the pros and cons of self-employment, to understanding tax and benefits when you’re self-employed.
Download your free in-depth guide to going self-employed today. Get instant access to expert hints and tips in the click of a few buttons.
There are five million self-employed people in the UK right now, contributing £305 billion to the national economy. Everyone knows someone who's done it, but how do you get started? Read our guide to going self-employed.
There are plenty of reasons to go self-employed. You get to ‘be your own boss’ and work more flexibly. And depending on your industry, you may be able to command a much higher rate than the salary you’d be able to achieve as an employee. Broaden your horizons with our guide to where in the UK commands the highest rates.
But there are downsides to self-employment – and when you’re thinking through being self-employed there’s lots to take into account.
There are pros and cons to being self-employed, and when you're weighing up self-employment against employment there are a number of things that you need to consider, including:
There are plenty of perks of being self-employed, and this list isn't exhaustive:
It’s important to take into account the disadvantages of being self-employed too, in particular the risks and costs that come with self-employment, for example:
When you’re going self-employed, there are several things you need to do, including telling HMRC that you’re self-employed for tax purposes, thinking about your business structure (which has an impact on the paperwork you’ll need to complete), and sorting out insurance.
When you go self-employed, you’re effectively setting up a business, even though you might not see it that way. This means that you need to decide on a business structure.
We've taken an in-depth look at setting up as a sole trader - usually the simplest business structure to choose when you go self-employed. However, you may also decide to incorporate as a limited company.
If you’re starting a limited company, there are certain things you need to do, including registering with Companies House, drawing up a memorandum of association, and paying corporation tax. Take a look at our article on sole traders versus limited companies if you’re not sure about the differences between these business structures.
If you’re going self-employed in the UK as a sole trader, these are some of the things you need to do:
The Office of Tax Simplification (OTS) has called for an urgent, digitally focused review of the self-employed tax system, calling it 'too difficult (...) to understand'. Until their suggestions are actioned, however, it's worth getting on the front foot with your tax, as soon as you go self-employed.
How much tax you’ll pay as a self-employed person will depend on how much money you’ve made and the ‘allowable expenses’ you’ve incurred in the course of your business. Certain business-related expenses can be subtracted from your income when you’re calculating your taxable profit.
The tax-free personal allowance and the tax bands are the same for self-employed and employed people, so for 2020-21 you can make up to £12,500 before you need to pay tax. You’ll then pay the basic rate of income tax (20 per cent) on income up to £50,000. The higher rate of 40 per cent applies to income over £50,000, and on income over £150,000 you pay the additional rate of 45 per cent.
Of course, you may be going self-employed part-time, and continue working for a company during the rest of the week. This means you’re both self-employed and employed, and you’ll pay tax through both PAYE and Self Assessment.
You could also be self-employed but only work for one company (for example if you have a single major client), but in this case HMRC will be keen to make sure that the company isn’t just calling you ‘self-employed’ to avoid paying National Insurance contributions and giving you employment rights. To count as self-employed you usually need to have choice over when and where you work and you’ll usually be paid when you issue invoices. Check the government website or speak to an accountant if you’re not sure – you can also read our guide to the off-payroll working rules (IR35) for more.
One of the disadvantages of being self-employed is that it can be more difficult to get a mortgage, but it is possible.
When you apply for a mortgage and you’re employed, the lender will usually confirm your income by asking for payslips and bank statements. When you’re self-employed, you’ll usually need to provide business accounts including a copy of your self-assessment tax return forms.
Lenders often ask for between two and three years of accounts, so you may not be able to get a mortgage if you’ve only just become self-employed.
Usually, the lender will take an average of your income over the last two or three years to calculate how much they’re willing to lend you. They may also ask to see other documents - business plans, for example - to check that they’re confident you’ll be able to keep up with the mortgage repayments.
In terms of what you can subtract from your income when you’re figuring out the self-employed profit that’s taxable, the list includes business insurance, part of your utility bills if you work from home, office costs, stock and certain business-related travel. Check the government website carefully though, as you could get in trouble with HMRC if you subtract something that’s not an allowable expense, or if you don’t have evidence of the expense.
For a full breakdown, take a look at our guide to self-employed tax deductible expenses.
Depending on certain factors, you may be able to claim certain benefits. If you’re self-employed and not earning very much money, you may be eligible for income support or working tax credit, although the latter has been replaced by universal credit for most people. Check the government website for more details – you can also read our guide to self-employed benefits entitlement.
You can claim Working Tax Credit when you’re self-employed, but in April 2015 the rules were tightened up. Self-employed tax credit claimants must show that they’re trading on a commercial basis with the aim of making profits, and that their self-employed work is structured, regular and ongoing. There’s further information on the criteria in this government briefing document.
Again, this is being replaced by Universal Credit.
You may still be eligible for Housing Benefit and council tax reduction if you’re self-employed but not earning very much money, and certain other factors apply. When the council is calculating your eligibility for benefits like Housing Benefit, they'll probably ask to see your business accounts for the last financial year, or a forecast if you haven’t started trading yet.
You may be eligible for Universal Credit if you're self-employed. You will have to declare your earnings at the end of each monthly assessment period, and will have to give details of any payments into or out of your business. Your work coach will also ask to see records of customers and suppliers, and marketing materials.
Your Universal Credit payments may be calculated based on your assumed earnings, which are known as the Minimum Income Floor. However, a different method may be used if you're in your first 12 months of self-employment, during which the Minimum Income Floor may not apply. During this period you may also be entitled to meetings with a work coach who's specifically trained in self-employment.
You may be able to get a grant from the government called a New Enterprise Allowance if you’re going self-employed. You may be eligible if you or your partner has been receiving Jobseeker’s Allowance or Employment and Support Allowance, or if you’ve been receiving income support, or if you’re a lone parent, sick or disabled. If your business is approved, you could get a weekly allowance worth up to £1,274 in total, over 26 weeks. You can also apply for a loan to help fund your startup.
There are some other small business grants available too, from the government local councils, the EU, and some organisations. Use the government’s finance finder tool to see if there’s a grant that could be suitable for you.
You can also read our guide to small business grants.
Take a look at our range of guides to going self-employed and how to set up your own business.
Share your self-employed experiences with us in the comments below.
With Simply Business you can build a single self employed insurance policy combining the covers that are relevant to you. Whether it's public liability insurance, professional indemnity or whatever else you need, we'll run you a quick quote online, and let you decide if we're a good fit.Start your quote
We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer
1 November 2019 • 4-minute read
So you’ve decided to take the leap and set up as self-employed? Congratulations – you’re at the beginning of an exciting journey. Before you…
25 November 2020 • 6-minute read
You can subtract your allowable business expenses from your turnover when working out how much tax you need to pay each year. But not all…
6th Floor99 Gresham StreetLondonEC2V 7NG
Sol House29 St Katherine's StreetNorthamptonNN1 2QZ
© Copyright 2021 Simply Business. All Rights Reserved. Simply Business is a trading name of Xbridge Limited which is authorised and regulated by the Financial Conduct Authority (Financial Services Registration No: 313348). Xbridge Limited (No: 3967717) has its registered office at 6th Floor, 99 Gresham Street, London, EC2V 7NG.