Starting out on your own - tips from an accountant
Including free resources to help you get started!
The recent increase in people choosing to branch out on their own as self-employed, freelance or starting up a new company is perhaps not such a surprise. The Corona lock-down period has already caused many people to be made redundant and ‘going it alone’ is a potentially quick solution to generating income. For others, the extended period of working from home helped them to reevaluate their career choices and perhaps gave them a bit of confidence to make the break for freedom.
Working for yourself and often by yourself is not for everyone but it can be financially rewarding and provide a flexibility that enables you to have a life more balanced and on your terms.
Imagine not asking for time off to pick your kids up or take a holiday. Nice huh? But then remember it will be more difficult to take sick or maternity leave. There are pros and cons in every situation but most people that take the leap to self-employment rarely look back!
However, even for the bravest of entrepreneurs, going it alone can be quite scary. We know that the tax and legal bits are what scares people the most, so it’s good to understand some basic principles right at the start of your journey.
So what do you need to consider? Let’s start with examining three main types of self-employed business you could start:
Sole Trader - this is the most basic and the simplest structure. You run the business as an individual and keep any profits you make after you pay your taxes. You are personally liable for any debts you accrue for the business, but by following our steps below and managing your accounts separately and professionally, this can be a really good option, especially if you are just starting out.
Partnership - this is when you go into business with someone else (or more than one person). It’s really important that you have a partnership agreement drawn up for this and you should understand that all debts are the personal responsibility of each partner in full. All partners have to submit a self-assessment tax return for their own share of the profits and one partner has to be nominated to submit a tax return for the business.
Private Limited Company (Ltd) - a Limited Company is its own legal entity and therefore the liabilities are separated from the people running it. It needs to be incorporated/registered with Companies’ House and annual accounts need to be submitted as well as a tax return sent to HMRC - the company pays taxes on profits. The director will also need to complete a self assessment tax return but only pays tax on the money he or she earns from running the business.
Start as you mean to go on
Good practices from the outset are going to make your exciting new business easier to manage, more profitable and stop the collywobbles when it comes to tax time. It’s not complicated if you keep things simple and follow our steps for getting started and staying organised:
Decide if you will be a Limited Company or Sole Trader (assuming no partnership at this stage). Self-employed as a sole trader is more straightforward but there may be tax or other benefits to you if you chose Limited Company structure. We are always happy to offer advice on the best option to structure yourself as a newly self-employed person and guide you through the process.
Register with HMRC for self assessment. You will need to submit a self assessment tax return each year. You have until 5th October in your second year of trading to register but we recommend doing this as soon as you can.
Incorporate your Limited Company - (if you chose to trade as a Limited Company). This means simply to register it with Companies’ House.
Open a business bank account. If you have a Limited Company then the bank account should be in the company name. Some self-employed Sole Trader businesses choose to just use their personal bank account but this can become confusing with personal and business expenses getting muddled and makes it much harder to track the profitability of your business. We always recommend a separate account for every type of business.
Keep good records. File all your invoices and receipts in date order in a folder separated by month (we really recommend that you keep up with this monthly too for your own sanity). For extra ease, you may use bookkeeping software such as Xero or for smaller businesses a spreadsheet will work just fine.
See the resources section at the end of this article for “Bookkeeping spreadsheet”.
Understand what are allowable business expenses and what are just fun/personal.
See the resources section at the end of this article for “Sole trader business expenses” or “Limited Company business expenses” help sheets.
Understand how best to pay yourself. As a Limited company it is usual to pay yourself a combination of director salary and dividends and there are strict rules about how to do this. If you are self-employed you may simply take drawings (drawings = money out for non-accountants!) whenever you want, you will be taxed on the profit of your business and not your drawings.
See the resources section at the end of this article for “Paying myself through my Ltd Company” help sheet.
Plan for your tax. The tax year runs 6th April to 5th April the following year. You will need to submit your self assessment tax return and pay your tax before 31st January each year. If you have a limited company, then your year end will depend on when you set your company up and you will have nine months after the year end to submit your accounts to Companies House and pay your corporation tax to HMRC. You will then have a year to submit your company tax return to HMRC. We recommend saving about 30% from your monthly income to cover tax. For limited companies, you need to factor in 19% of profits for Corporation Tax - this amount is calculated before dividends.
See the resources section at the end of this article for a “Dividend estimator.”
Hire an accountant. Yeah, I know, we would say this… but honestly it will save you money and stress in the long run. If you are a small business and follow our principles above (especially using digital bookkeeping like Xero) then managing your monthly books is something that you can do yourself - though as soon as you find you are too busy to keep on top of it monthly - that’s a warning sign to get a bookkeeper to do it for you! However, your annual accounts and tax return is better left to an accountant. It’s an investment that can save you from losing your hair and your shirt!
GET THE FREE RESOURCES
To access the free resources mentioned throughout this article, simply click on the link and enter your email address. You'll get an email containing all the resources mentioned in this article!
Still unsure how to start your new business as self-employed? Give us a call, we’d be happy to advise you.
☎️TEL: 07841 042077