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Thinking of going 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.
There are over four million self-employed people in the UK right now. In 2022, the self-employed workforce contributed £278 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 and watch our video below.
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.
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 going self-employed, and when you're weighing up self-employment against employment there are a number of things that you need to consider, including:
You’ll also need to think about personal things such as whether you’d miss working with colleagues, if you have the space you need, and any upcoming life-changing events like moving home or having a baby.
There are plenty of perks to being self-employed, and this list isn't exhaustive:
There are also many financial benefits if you’re self-employed. You can deduct costs such as travel and some utilities bills from your income when calculating your tax liability.
Meanwhile, day rates for self-employed consultants and freelancers tend to be much higher than salaries, so there’s potential to earn more money.
It’s important to take into account the disadvantages of being self-employed too. There are some challenges, such as:
You’ll also need to consider some of the risks of being 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 2023-24 you can make up to £12,570 before you need to pay tax.
You’ll then pay the basic rate of income tax (20 per cent) on income up to £50,270. The higher rate of 40 per cent applies to income over £50,2710, and on income over £125,140 you pay the additional rate of 45 per cent.
Most self-employed people will need to pay Class 2 and 4 National Insurance contributions.
You'll pay this as part of the Self Assessment tax returns process, which needs to be completed by 31 January every year.
When you’re going self-employed there are several things you need to do, including 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 setting up 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 vs 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:
Of course, you may be going self-employed part-time or have a side hustle, but 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.
Registering as self-employed with HMRC and setting up as a sole trader are two of the first things you need to do when you start your own business.
Our guide on how to register as self-employed gives you an overview of everything you need to know, from how to set up, to your responsibilities once you’ve registered.
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's self-employed guidance 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 has been 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, as well as local councils and some organisations. Use the government’s finance finder tool to see if there’s a grant that could be suitable for you.
Read our guide to small business grants for more information.
Take a look at our range of guides on starting your own business and how to set up as self-employed.
Share your experiences of going self-employed with us in the comments below.
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Catriona Smith is a content and marketing professional with 12 years’ experience across the financial services, higher education, and insurance sectors. She’s also a trained NCTJ Gold Standard journalist. As a Senior Copywriter at Simply Business, Catriona has in-depth knowledge of small business concerns and specialises in tax, marketing, and business operations. Catriona lives in the seaside city of Brighton where she’s also a freelance yoga teacher.
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