Setting up a business can be relatively straightforward, but it’s something you’ll need to put plenty of thought into. What products or services will you offer, and how much will you charge?
Do you need premises or equipment? Are there any legal or regulatory requirements to consider, and what will your business plan look like? Then of course there’s tax to pay and customers to find – and that’s just to start with!
With more than 4 million people in the UK currently self-employed, it’s certainly a very popular option. If you’re thinking of starting your own business, take a look at our beginners guide to kick you off.
People chose to become self-employed for a huge variety of reasons. From having more control over the work which you take on, to being more flexible with when and where you do it, and beyond to all manner of financial reasons. What you might consider to be a benefit largely depends on what you need to get out of being self-employed.
What are the disadvantages of being self-employed?
One big challenge with being self-employed is that you don’t get any of the benefits that employed people get. These include things like sick pay, paid time off, and employer-sponsored pension contributions.
When you’re self-employed you’re also responsible for managing your own taxes, which can be complex and time-consuming, often requiring a good understanding of tax regulations.
Lots of people also find that their earnings aren’t always consistent – especially when your business is still new. This can make it harder to access some types of financial services, such as mortgages and personal loans, because lenders may consider your income to be less stable compared to someone in employment.
Being ‘self-employed’ simply means that you work for yourself, but this doesn’t actually explain how you operate the business. It’s your business structure that refers to the legal status of your business, and this affects how you set it up, what tax you pay, and even how you take money out of the business for yourself.
There are lots of options available depending on your needs, so think about things like:
How financially risky the business is
The income you expect to make
Whether you want to information about your business to be publicly available
This is entirely up to you, as long as the name is available to use and doesn’t give the impression that your business is part of another organisation or affiliated in some way. Some businesses use a ‘trading name’, where you register the business under one title but then use a different name to actually carry out work.
For example, you might register the business using your actual name, but use the trading name ‘Electricians on Demand’ for marketing reasons.
What do I do next?
Your next steps partly depend on what business structure you choose, along with other factors such as the industry you work in (for example, if you need a specific type of insurance to be allowed to do this sort of work).
You’ll also need to have a think about market research. Writing a business plan can also be a useful way to organise your thoughts and make those early decisions (we have a free business plan template to help you get started!).
The type of tax returns you need to submit and the tax you must pay partly depends on what sort of business structure you operate, but it’s also affected by other factors such as your turnover, who you work with, and whether you employ anyone.
The table shown below briefly explains what types of tax might affect your business, as well as other deductions you could see as part of your tax calculation.
Type of tax
What is it?
A tax you pay on any personal income you receive, such as profits from being a sole trader, money you make from renting out a property, or a salary you take from an employer.
National Insurance Contributions (NICs)
Self-employed people pay National Insurance Contributions on their personal income. You might also need to make employer’s NICs if you hire someone else to work for you.
You’ll only need to register your business for VAT if your taxable turnover reaches the registration threshold in any 12-month period. The type of structure you use doesn’t affect whether you can or need to register – any business can do so. You can also choose to register for VAT voluntarily.
One of the most common questions that new startups ask is around charging for goods and services. There are lots of online formulas and guides to this, but one of the biggest obstacles that most self-employed people face is self-confidence! Deciding what to charge your clients and customers means treading the fine line between making a profit, and the sheer terror that nobody will pay you what you’re asking for.
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About The Author
A creative content writer specialising across business, finance and software topics. I have a love for all things writing, and creating engaging, easy to understand content that helps everyday people! Learn more about Rachael.