Going self-employed means earning a living by working for yourself rather than someone else. You’re solely responsible for your business’ success (or failure) and must comply with the law when it comes to things such as paying tax and filing tax returns.
Read on to learn more about the different ways to set up as self-employed, what it costs, what your obligations are in terms of tax and registering with HMRC, and whether going self-employed is right for you.
What does it mean to be self-employed?
Being self-employed means earning a living by working for yourself. You decide when and where you work and take sole responsibility for how your business runs from day to day.
There are different ways to be self-employed, and which one you choose depends on what is right for you. For example, you might set up as:
Learn more in our guide to start-up business structures.
Is going self-employed right for me?
Being self-employed isn’t for everyone. It has both its benefits and drawbacks, and there are a number of important questions you should ask yourself before you proceed. For example:
- Do you have the financing you need to get a new business off the ground?
- Do you have a plan for how you’ll attract clients/customers?
- Do you understand what’s involved in managing a business, when it comes to things like record-keeping, paying tax and controlling cashflow?
- If necessary, do you have premises from which you can operate?
- Can you do without the benefits that come with being employed by someone else (for example, paid leave, sick pay, pension contributions)?
- Do you have the equipment you need, or the money to buy it?
- Is it the right time? Do you have things going on in your life that might affect your financial situation (for example, a house move or a wedding)?
Pros and cons of being self-employed
- Run your business the way you want
- Set your own working hours
- More flexibility when fitting work around your home life
- Better earning potential – rates for self-employed workers are typically higher than salaries paid to employees
- You take home all of the profit you make (after tax)
- Base yourself where the work is – no need to commute if you don’t want to
- Often more variety if you’re working for different clients at the same time
- Benefit from certain tax deductions
- Good if you like working alone
- Long hours, particularly in the beginning as you establish yourself
- Can be difficult to find clients
- Setting up a new business can be expensive, so you’ll need that initial start-up cash
- Income can fluctuate, making it vital that you stay on top of your finances
- You must handle the admin that comes with running a business – paying taxes, keeping records, complying with the law
- The business’s success or failure is your sole responsibility
- No paid leave, sick pay or company pension
- Can make getting a mortgage a little more challenging
- Sometimes hard to maintain a proper work-life balance
- Can be lonely if you’re used to working alongside other people
What does it cost to go self-employed?
The cost of going self-employed depends on what it is you’ll be doing and how you’ll operate.
If you need premises, equipment or to hire staff, for example, these are all expenses that you’ll need to factor in when working out what it will cost to start your own business.
Read our guide on how to calculate business start-up costs.
What type of business you run will influence whether you need a workspace such as an office, a shop or a warehouse.
If you do require premises, consider whether it’s best for you to rent or buy. Obviously, this will come down to budget and your expectations for how the business will grow and the revenue it will generate.
Learn more about whether you should rent or buy business premises.
You may need to buy equipment, machinery and/or vehicles for your new business. These items are known as assets, and you must factor them in when calculating the cost of going self-employed.
Because assets fall under HMRC’s capital allowance scheme, you can offset their cost against the profits your business makes, in turn reducing the amount of corporation tax you’ll pay. (This doesn’t apply to company vehicles, however.)
Being self-employed doesn’t necessarily mean you must work on your own – you can employ staff to help you. And as your business grows, this is likely something you’ll need to think about.
However, be aware that hiring employees too soon could put a strain on your finances. If the demand for what you’re selling isn’t there but you go ahead and recruit staff anyway, you could be paying more towards salaries than the revenue you’re generating as a business.
Also keep in mind that as soon as you hire someone, you must let HMRC know. You’ll then need to collect income tax and National Insurance from your staff through a PAYE payroll scheme.
Read our guide on how to tell when your business needs to hire staff.
A crucial part of being self-employed is the bookkeeping. You’re responsible for doing your own tax returns and making sure you pay all the tax you owe, among other duties.
Many self-employed people take on this role themselves (often using accountancy software), while others pay an accountant to do the work for them. Whether you choose to employ an accountant after you register as self-employed is up to you, but in any case you should always keep track of your business’s finances and maintain proper records.
Read our guide to finding a good accountant.
As someone who’s self-employed, you’ll need business insurance to protect your business (and you and any staff) should anything go wrong. Such a policy will cover things like compensation claims and legal costs.
Read our guide to insurance for small businesses.
What tax do I pay when self-employed?
There are a number of taxes that you need to pay when self-employed, and it’s important to know when and why you must pay them. They include:
- income tax
- National Insurance
- business rates
- corporation tax
Once you through HMRC, you’re expected to handle your own tax affairs (or have your accountant do it) and pay the tax you owe each year. This means filling out a tax return every tax year and returning it to HMRC along with the full payment.
How much tax you pay will depend on the amount of money you’ve made and the you’ve run up while doing business. You’re able to deduct some of these expenses from your income when working out the amount of profit on which you must pay tax.
The tax-free personal allowance that applies to people who work for employers is the same for people who are self-employed. This means you can earn up to a certain amount before you start to pay tax. You then pay the basic rate of income tax on income up to a particular threshold.
Read more in our guide to tax for self-employed people
What expenses can I claim when self-employed?
When you’re self-employed, you’re entitled to claim certain business expenses (known as allowable expenses). This means any costs that you can exclusively attribute to work purposes. Typical examples include:
- travel expenses
- business insurance
- bank charges
- delivery charges
- equipment costs
- utility costs for business premises
- phone charges
You deduct these from your income when you’re calculating your taxable profit as part of the yearly tax return you submit to HMRC.
For a full list of expenses HMRC deems allowable, visit GOV.UK
Can I go self-employed while working for an employer?
Yes, and this is quite common. Some people who choose to go self-employed will be working for an employer part of the time – for example, during the day, while running their own business in the evenings.
If you do this, keep in mind that you’re both self-employed and employed, which has implications in terms of the amount of tax you pay and how you pay it.
To learn more about the rules around employment status, visit GOV.UK
How do I register as self-employed?
When you go self-employed, you must register this with HMRC. This is for tax purposes, to let HMRC know that you’ll be paying tax through its Self Assessment system and making Class 2 and 4 National Insurance contributions.
Registering as self-employed is straightforward, and you can do it quickly online at GOV.UK.
Disclaimer: While we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.