Self-employed in the UK? | A step by step guide to being your own boss.
Are you looking to become self-employed in the UK?
Are you thinking of leaving your “proper job” to strike out on your own?
Do you fancy being your own boss?
Well, you are not alone.
According to a study by The Association of Independent Professionals and the Self-Employed (IPSE) , one in seven of the UK workforce is self-employed. Of these, nearly two million are independent professionals and they contribute a whopping £119 billion to the UK economy.
IPSE defined a freelancer as a self-employed worker with no employees working in a range of managerial, professional and technical occupations.
So how do you go about it? How do you take the plunge?
I bet you are worried about your mortgage or rent, the kid’s school fees, their extra-curricular activities, well it isn’t going to be easy, but 2 million people cannot have it all wrong. Can they?
Just do it.
Starting out on your own can be daunting. You probably think you have to have everything in place, a brand new logo, business cards a slick website, blog, etc. Do you know what? All of these things would be great, but they are not essential.
What you initially need is is a go-get attitude, realistic expectations, a financial buffer to see you through the initial stages of setting up and a framework
We wrote this guide to help you take these decisions and set up as an independent professional. This is not meant to be a comprehensive guide. We would advise you to seek the advice of an accountant and lawyer. A good starting point would be to get in touch with IPSE, (The Association of Independent Professionals and the Self-Employed),
In this guide we will cover :
- Employment Status
- Trading Structures
- VAT or Corporation Tax
- Get a business bank account
- Source an accountant
- Get connected
The first thing you need to do is regularise yourself.
You need to understand the rules and tax regulations that govern anyone working independently as these could affect how you set up your business.
So for tax purposes are you going to be self-employed or employed?
According to the British taxman, also known as Her Majesty’s Revenue and Customs (HMRC), you are only classified as self-employed if you are NOT employed by a company.
And here is where it can get a little bit complicated and confusing.
Freelancers in the UK can operate as a sole trader, a limited company, a partnership, a limited liability partnership (LLP) or as an umbrella company.
Before we get into the various legal structures you can choose from to run your business, let’s clarify your employment status.
The taxman in the UK will consider you as self-employed if and only if you operate as: a sole trader, in other words, you don’t employ anyone else, or if you are in a partnership.
1. a sole trader, in other words, you don’t employ anyone else, or if you are in a partnership or
2. if you are in a partnership.
If you pay yourself through your own limited company, even though you are the boss and no one else works for you, the taxman will NOT consider you as self-employed.
Theoretically, your own company employs you.
If you work for one client or you have long contracts with a number of clients you might be vulnerable too.
The tax authorities might challenge the relationship you have with your client/clients.
They may consider you not as a self-employed freelancer or as a legitimate business but more as an employee of your client or clients.
This could potentially lead to penalties and more tax to pay for the end-client and possibly yourself.
If HMRC is successful and they determine that you are not self-employed but your client’s employee, they will seek to recover the lost Employer’s National Insurance Contributions (NICs) from the end-client.
They could also seek to charge interest and penalties especially if they argue that the client knowingly treated you as self-employed and not as an employee.
In a nutshell, if you work for a client through an intermediary you could be liable to pay more tax and NIC (National Insurance Contributions).
This additional tax and National Insurance Contribution falls under the intermediaries legislation or as it is commonly known as the IR35.
What’s an Intermediary?
An intermediary, as prescribed by the IR35 legislation, could be:
- A partnership
- Your own liability company or
- A service or personal service company
The government implemented this law to regularise contractors who were essentially the employees of a company.
However, the lines are blurry.
How does the HMRC determine whether you or your latest contract falls under the IR35 or not?
The tax authorities are going to be looking and assessing your relationship with your client, and they will be assessing whether it is that of an employee or of an external provider.
They will be taking many factors into consideration and using these to create a clear image of your relationship with your client.
Is it that of an employee or of a contractor?
The key is to think and act like a business. You are an independent professional providing a service to your client.
Are you an Employee or are you Self-Employed?
Employees are obliged to turn up to work and employers have an obligation to pay them, even if they are not happy with the standard of their work or if they have nothing to do.
If you can decide when and where you work; what hours you keep; if you can terminate a contract relatively easily; or if you can choose to turn down a particular job, then you will not be deemed as an employee.
If you have a certain amount of control over your work and you are using your expertise to propose solutions, then you will not be considered as an employee.
An employee has to do the work he is contracted to do himself, whereas a service provider is not. So they will be looking at whether you have the right to appoint a substitute to do the work for you. It doesn’t matter if you never use a substitute, they will be looking at whether you have the right to do that.
They will be assessing the structure of your company and the financial responsibilities taken towards running your own business. So for example, they will be evaluating your marketing efforts. Do you have a website? Are you active on social media channels such as LinkedIn? If you do, then you cannot be considered as an employee of that company.
How many clients have you got? If you are working for more than one client than you cannot be considered as an employee.
What if you swap this contract for employment with the client, how will it affect the way you work?
If it doesn’t really affect the way you are working now then you are going to fall under the IR35 and you need to take some drastic measures to change this.
The UK government’s portal is a good place to check whether your latest contract could fall under the IR35 legislation.
Act as a business
Our advice to you is to think and act as a business and not as an employee. Some fundamental things to look at:
- Hire a good accountant
- Keep an updated audit trail of any purchases and transaction
- Keep all paper records
- Review each contract with regards to its IR35 status
- Always ensure you have professional representation when dealing with the tax authorities.
There are a number of trading structures available, each has its own tax and legal implications.
Let’s take a brief look at the trading structures available to you.
You are self-employed if you work on your own and you do not employ any other employees.
The simplest route to take as a freelancer is setting up as a sole trader, however, this route means you are liable for your company’s debts including lawsuits. You should, therefore, consider protecting yourself by taking out insurance, such as Professional Indemnity. Contact us for more information.
Find out more about registering as a sole trader.
A limited company is a popular choice for those seeking to work independently.
A limited company means that your own personal finances are separate from those of your company. If the company goes bust or gets sued your personal assets are protected unless you have acted fraudulently or negligently.
This obviously increases your responsibilities. Most use the services of an accountant to help them set up their company but you can also set it up on your own.
Find out more at Gov.uk.
A partnership is a simple way to set up, if you are looking to go into business with others.
This would mean that you share the responsibility of your business’s’ debts.
There are more rules and regulations involved in running a partnership however with the help of a good accountant it shouldn’t be too challenging.
There are 2 types of partnerships that you can set up:
Similar to a sole trader, your business is not a separate legal entity.
The partners are jointly personally responsible for any business debts.
For tax purposes, each partner is taxed on their share of the profits and so each partner is responsible for ensuring that they pay the right amount of taxes.
Find out more about setting up a partnership.
An LLP doesn’t have partners, it has members. A member can be a partner or a company, a corporate member.
In an LLP some or all of its members have limited liability. An LLP must be formally incorporated to exist and it has a legal existence independent of its members.
For tax purposes an LLP is treated exactly the same as a partnership, so each member pays tax on their share of the profits however in the absence of fraud or wrongful trading they are not personally liable for any business debts.
The accounting rules and regulations for an LLP are more rigorous.
As a member of a partnership, you will need to register as self-employed.
An umbrella company is a service for those who do not want to run their own company.
They are intrinsically a service provider that will deal with all the admin and the responsibilities of running your own business.
The umbrella company takes care of invoicing, payroll and all the paperwork. All you have to do is secure your own work.
You, therefore, become an employee of the umbrella company.
It’s definitely easier, but intrinsically it’s not your own company.
Ensure you do your seek recommendations and do your research before choosing which Umbrella Company to sign up with. Ensure that the umbrella company you choose is a PAYE Umbrella.
Remember that nothing is set in stone.
You are your own Boss, and you can decide to change from an umbrella company to a Limited liability or any other trading structure you choose.
If, applicable register for VAT.
For the tax year 2017/18, the Vat threshold is £85,000.
You don’t have to register until you reach the threshold. However registering early means you avoid any late registration penalties and don’t have to worry about monitoring your turnover.
You might also want to research the Flat Rate Scheme as this could mean you are better off financially.
If you have registered as a Limited Company then you need to be registering for Corporation Tax.
It’s important that you keep your business and personal accounts separate.
Failing to do this can lead to confusion and could land you in hot water with the tax authorities.
Doing it on your own can be daunting so make sure you hire a good accountant.
Do your research and get personal referrals and recommendations.
Ensure that whoever you hire is suitable for your line of business and is well versed in all the regulations governing freelance work.
Now that you have set yourself up as a freelancer, contractor, consultant, it’s time to start planning.
Have a 3 month plan.
Create a simple business plan to focus your mind and establish your plan of action.
Set your goals. Understand your expected income. Get to know what the are costs going to be. Think about how you are going to secure your contracts. Develop your pricing model. And of course, create a plan of how you are going to market yourself or product?
Chris Kaye, Sherpa’s CEO states
“It’s fundamental to have business objectives outlined however, always allow for flexibility and innovation when doing this. Markets fluctuate, consumer perceptions evolve and businesses change, meaning you might have to stray from your original plan. It does not mean your business plan has failed; understanding what is and is not working for your business means you can make the necessary changes to remain on track.”
Think about how are your prospective clients going to find you.
At the very minimum, you will need a phone line, a business email and a Skype account. Getting a separate business email and phone line will not only give you more professional image but you could also claim such expenses back.
There are a number of tools and service providers such as mixmax, a productivity suite for Gmail and Google Inbox; Trello , a project management tool and moneypenny, a call answering service, that will help you stay organised and connected.
Whatever your profession you should also consider a website and setting up profiles on appropriate social media channels such as Facebook, Instagram and LinkedIn.
You do not have to be present on all social media channels.
Consider your target audience and your resources such as time and budget and pick the two that will serve your marketing goals best.
Running your own business involves lots of paperwork.
Legally you are obliged to keep your business records.
From day one set up a system to regularise and file all of your paperwork, receipts, invoices, purchase orders.
Whatever you do, do not stuff your paperwork in a Sainsbury’s shopping bag and tell yourself you will do it later.
Ask your accountant to help you find a solution or set up your record keeping. There are many innovative tools you can use today such as Wave.
Keep your files on the cloud or scan your records on a storage device, such as a USB stick or a network drive.
The HMRC will accept scans that are readable and that present both the front and the back of the document, so there is no need to rush out and get yourself a storage unit.
If you’ve left a role in a company to become self-employed, have you thought about any employee benefits you have now have lost?
These might include death in service cover; a company pension; private medical insurance; or continued payment of your salary in the event of you being unable to work due to an accident or illness.
The loss of these benefits might mean that the financial consequences of death or suffering a critical illness have a more significant impact on you and your family during a period of family distress and emotional turmoil.
It’s really important that you consider how you might replace these benefits despite your finances being stretched – starting a business can be financially draining.
Self-employed people are also often required to provide professional indemnity insurance to their clients – this covers the cost of compensating clients for loss or damage resulting from negligent services or advice provided.
What About Sherpa?
Here at Sherpa, we help you understand the risks you might now be exposed to as a self-employed individual and suggest ways in which you could protect yourself.
We use your data as well as actuarial data, open data and APIs to identify your overall risk profile and give you a score to reflect how well each type of risk is covered either by existing insurance, or by your own financial resilience e.g. access to savings.
Any gaps in your level of protection for each risk type will be highlighted and Sherpa can offer ways to fill these gaps. As you live your life your risk profile will change and Sherpa will help you to ensure your level of protection remains sufficient and relevant to your needs.
Contact us to join the Founding Member waitlist and benefit from Early Access.
Lastly, Have FUN
You’ve taken the leap. You are all set up. Believe in yourself and go for it.