The idea of being your own boss is at once both terrifying and liberating. There are countless stories of failure, but there are plenty of successes too. Others have learnt from their failures so you might not have to!
If you’re going to make this big step in your career, Count have some things we think you should keep in mind for the future!
Making that first decision
You might have made your mind up already about becoming self-employed, but there are some things to consider (or reconsider) before you make this decision.
The idea of being your own boss and having a more flexible timetable can be really appealing, but this comes at a cost.
Here are a list of questions you should ask yourself before making this first step:
- Do you have a business plan in place?
- Do you have capital to start your small business?
- Is there a gap in the market for your product? If so, how do you plan on drawing in clients and customers?
- Can you go months, or even years, without a salary?
- Are you prepared to manage all the administrative procedures required to set up your small business?
Once you’ve thought about these things, you’ll be in a much better place to make a decision regarding going it alone.
The First Step
Once you’ve made your decision, there are a number of steps you need to take in order to become self-employed.
Your first step is to make a decision as to whether you’re starting a limited company, or setting up as a sole trader.
A sole trader assumes that you are the sole owner of your business. This is a simple structure popular with many new small businesses.
A limited company, on the other hand, requires you to establish that your business is a separate legal entity.
So, lets assume that you’re setting up your business as a sole trader. In this instance, there are some important steps you have to take in order to establish your company.
- Firstly, you need to inform HMRC that you are now self-employed. That way, HMRC knows that you have to pay tax through a Self Assessment. See more on how to file a Self Assessment tax return on the government website.
- Another place to start would be to find an office to work from. You could do this from home, but you may have to check your tenancy agreement to see if this is allowed. You might have to notify your landlord in any case.
- Setting up a business bank account is a pretty satisfying step. If you’re a sole trader, it’s not legally required but it can be really helpful in tracking your transactions.
- Choose a financial recording method. This might not seem that significant, but tracking your financial transactions could save you a significant amount of money and time in the future.
- We’ve left the most important until last – choose a market. If you’re becoming self-employed and setting up a business as a sole trader, you need to know the market you’ll be getting into. Doing some research and getting a better understanding of your target audience, competitors and other details can help you get off the ground!
Understanding Tax
We can pretty confidently say that learning about taxation is not the reason you’re starting your own small business. Knowing the law, however, and understanding how tax will affect you is extremely important for the daily running of your company.
Tax affects a number of things: your salary; your profits; and your expenses. So, as tax experts, we’ll run through a couple of these to help you understand why it’s so important.
When it comes to the early stages of your business, you will most likely go without a salary for a considerable amount of time. This is because new businesses are unlikely to turn a profit, and many people will take salary cuts themselves in order to help propel their business forward.
So, how much tax do you pay if you’re self employed?
This will depend on a couple of things.
Firstly, the tax you pay as a business depends on the amount of money you have made throughout that fiscal year. Some costs of running a business may be considered allowable expenses and you could qualify for a tax deduction!
Fortunately, for both employed and self-employed people, the tax bands do not change. In 2020-2021, if you earn up to £12,500 you do not have to pay tax. As this value increases, tax charges will begin to apply. The basic rate of income tax (20 percent) is charged on earnings between £12,500 and £50,000.
If you’re lucky enough to earn more than this (between £50,000 and £150,000), you would pay an income tax rate of 40 per cent. For earnings over £150,000, you would need to pay a 45 percent tax rate. Check out the government website for some of the finer details.
The Bottom Line
Becoming self-employed is a big leap. Setting up your own business and becoming your own boss has its rewards but requires a lot of preparation. Keep in mind those things above before you make the decision and, once you have, make sure you put yourself in the best position to succeed.
Take a look at some of our other guides for more help on running your own small business!