Becoming self-employed does come with its own set of legal and financial responsibilities. From choosing the right business structure to understanding tax obligations, it can feel overwhelming to begin with - but it doesn’t have to be.
In this Aatos guide, we'll break down the most important steps for setting up your self-employment path correctly. We'll cover how to register your business, manage your finances, draft essential contracts, and comply with necessary regulations to set you up for success.
By understanding these key aspects of self-employment, you can ensure you’re well-prepared to succeed in the world of self-employment.
Legal Structure & Self-Employed Registration Options
When you’re setting up your business in the UK, you can choose from several structures, each affecting your liability and taxes differently.
- As a sole trader, you manage your business alone and are personally responsible for business debts. This is the simplest form, but it means your personal assets could be at risk.
- Partnerships involve sharing profits, losses, and responsibilities with one or more partners.
- Limited companies provide limited liability protection, meaning your personal assets are usually safe if the business runs into trouble.
Each structure has different tax implications, so choose the one that best fits your business needs and personal risk tolerance.
To officially start your business, you'll need to register as self-employed with HM Revenue and Customs (HMRC). This is crucial to do as soon as you start your business activities. You can register online at the HMRC website where you’ll be guided through the process.
Financial Management and Tax Obligations
Self-employed tax is something you have to sort out manually at the end of each tax year.
As a self-employed individual, you’re responsible for paying income tax through the Self-Assessment tax return process. You may also need to handle Value Added Tax (VAT) if your business’s turnover exceeds the current VAT threshold.
Depending on your earnings, you might also need to make Payments on Account, which are advance payments towards your tax bill based on an estimate of the self-employed taxes you’ll owe by the end of the year.
It’s essential as somebody who is self-employed that you keep detailed financial records. These will help you monitor the business’s financial health, prepare accurate financial statements, and keep track of deductible expenses which will be very important for tax purposes.
Also, don’t forget that as a self-employed person you’re responsible for setting up and paying into your own self-employed pension, and you’re only entitled to statutory sick pay as a self-employed person.
While managing finances on your own is possible, consulting an accountant can be a game-changer. An accountant can help you understand complex financial matters, optimise your tax situation, and ensure your financial reporting meets legal standards.
Read more about what is Cease and Desist Letter
Contractual Agreements and Terms of Service
When offering services, you’ll need to have a well-drafted contract in place with each client. This contract should clearly outline the terms of service, payment terms, and deliverables.
Including a dispute resolution clause in your contract is essential. This clause should detail the steps to be taken if a disagreement arises, helping to resolve issues professionally and amicably. Effective dispute resolution methods might include mediation or arbitration, which can prevent costly legal battles and help to preserve your business relationships.
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Compliance with Regulations
Below, we'll cover essential aspects that anyone becoming self-employed should be aware of, including licences and permits, data protection and intellectual property, and insurance requirements.
Licences and Permits
Depending on your industry, you might need specific certifications, so be sure to have the right licences or permits to operate legally.
Getting the right paperwork in order prevents legal issues and keeps your business running smoothly.
Data Protection and Intellectual Property
Staying on top of data protection laws like GDPR is a must. Also, make sure you know your intellectual property rights to protect your and your clients’ creative work.
Insurance Requirements
Choose the right insurance to protect different aspects of your business.
Public liability insurance covers damage you might be responsible for, while professional indemnity insurance protects against claims from the advice or services you provide. Proper insurance shields you from significant financial risks.
Read more about contract termination.
Support Systems and Additional Resources
There’s no sugarcoating it: Self-employment can be hard at times. That’s why it’s a great idea to tap into support networks to gain insights and reduce the isolation that can come with self-employment.
For self-employed individuals in the UK, Universal Credit can provide vital financial support during slower business periods. This benefit adjusts based on your monthly earnings, making it suitable for the fluctuating incomes typical in self-employment.
It’s also a good idea when you’re getting started to get advice from experts who can help you understand your obligations and develop strategies tailored to your situation. That way, you can ensure compliance and maximise your business’s potential.
Join online forums, professional networks, and take advantage of government resources designed for self-employed people. These resources can offer invaluable advice, share knowledge, and open up new opportunities.
