Self-employment: A guide to working for yourself

If you want to be your own boss, make sure you know your legal, tax and insurance obligations first.

Gocompare author
Updated 12 January 2022  | 3 mins read

There are lots of perks to being self-employed, like choosing your own hours, increased freedom and greater job satisfaction, but there are downsides, too.

Getting established, financial insecurity and potential isolation can make working for yourself a tough gig, so it’s not a decision to be taken lightly.

If you’ve weighed up the pros and cons and decided it’s time to be your own boss, here’s what you need to do to make it official - and to give yourself the best chance of success.

Key points

  • You need to register as self-employed with HMRC to pay income tax and National Insurance
  • You might find it easier to separate your business finances from your everyday current account
  • Make sure you take out the right business insurance for your enterprise

Register as self-employed for tax

You’ll spend a lot of time dealing with HM Revenue & Customs (HMRC) as a self-employed worker - this is the government department to which you pay tax instead of it being taken straight out of your monthly pay in a traditional work environment.

You need to register as self-employed with HMRC within three months of starting trading, and you can do so online or by phone.

Most people will register as a sole trader - this is when you have complete control over your business and its finances.

However, it’s also possible to register as a partnership, if two or more people want to go into business together - this merely links people together in a simple business structure and involves about the same amount of bureaucracy as sole trading.

Some people choose to set up a limited liability company instead. In this case, the company’s finances are entirely separate from the personal finances of the business owner, so if a financial claim is made against your company you will not be liable personally.

It’s also possible for limited companies to pay less tax, as directors can pay small salaries and high dividends which are free from National Insurance.

However, there's considerably more paperwork and there are legal obligations involved.

Only you can decide which structure best fits your situation, but many people choose to start out as a sole trader and later on form a limited company.

Understand your financial obligations

For many people setting up as self-employed, this will be the first time they’ve had to handle their own tax before, and it can seem confusing.

Income tax

You’ll pay income tax on your earnings after personal allowances and business expenses have been taken into consideration.

The rate you pay for tax will depend on your earnings, which is why you must complete a self-assessment tax return for every financial year (or part of) that you’re self-employed.

This can be completed on paper by October or online by 31 January for your previous year’s figures.

National Insurance

You’ll also probably pay class 2 and/or class 4 National Insurance contributions (NICs).

Class 2 NICs are charged at a flat rate - in the 2014-15 tax year this was £2.75 a week, providing profits were more than £5,885 a year.

HMRC will either send you a bill for this every six months, or take monthly direct debit payments should you choose to pay this way.

In March 2016, Chancellor George Osborne announced that the government was scrapping class 2 NICs from April 2018. From then, self-employed people will only need to pay class 4 NICs.

Class 4 NICs are calculated as a percentage of your profits and paid alongside your tax bill.

Look into working tax credits

If you anticipate low revenue in the early days, make sure you check out your working tax credit entitlement.

Register for VAT if applicable

From April 2014 you’ll have to register for VAT if your business has an annual turnover of £81,000 or more - this threshold usually rises by a few thousand pounds each year.

If at any stage during the business cycle it looks like you’re going to hit this threshold in the coming months you must also register, or risk paying a fine.

Some self-employed people choose to register for VAT even if they don’t need to, as it means they're able to claim VAT back on eligible purchases, or even gain commercial credibility by having a VAT number.

Get your finances organised

Without an accounts department to do the number crunching for you, it’s vital that you keep on top of your monthly finances.

This will help you avoid cash flow issues and make completing your tax return considerably easier when the time comes.

If you’re a sole trader, there’s nothing to say you can’t be paid into your personal current account, but this isn’t advisable as it’s easy for payments in and out to get mixed up.

Instead, open a separate account exclusively for work purposes; ask your clients to pay into this one, and then take your salary out of it and put it into your own account.

It’s crucial that you set aside some money from every payment you receive for your tax bill at the end of the year (at least 20%), so you might consider opening an additional savings account for this purpose.

You’ll also need to keep track of your receipts and business expenses, as these can be off-set against tax at the end of the year. HMRC’s website has a comprehensive list of allowable expenses.

Logging everything at the end of each month will help you keep on top of things.

If managing your own finances seems too overwhelming, you might consider hiring an accountant to help you.

Insurance for the self-employed

Depending on the type of business you have, you may be required by law to have certain business insurance policies in place.

Many small businesses take out public liability insurance, especially if customers visit your premises or you work on theirs. This protects you if damage or injury is caused as a result of your business activities.

If you provide professional services or advice as part of your job, you should consider getting professional indemnity insurance, which will cover you if a client is unhappy with the work you’ve done, or if they themselves face legal issues because of it.

If you employ other people, you must by law have employers' liability insurance, which covers claims made by employees who are injured or become ill as a result of their work for you.

If you work from home you’ll need to make sure you have a home insurance policy that allows for this.

Finally, depending on your business, you should consider specialist insurance specific to your activities, such as vehicles insurance, premises insurance or contents, stock and materials insurance.