Starting a business
In recent years, more and more people are starting businesses or becoming self-employed with a variety of motivations. For some it is lack of availability of suitable work, others seek the flexibility that regular employment fails to offer and others who feel it is the only way to do the type work they really want to. In April 2012 the Office for National Statistics recorded an increase in the number of Self Employed works of 84,000 within a three-month period which is the highest rise since records began in 1992. At that time there were 4.2 million people in Self Employment. By 2014 15% of the workforce were Self Employed bringing the total up to a new record high of 4.6 million. In addition, the number of self-employed people aged 65 and over has more than doubled in the past five years.
Self-employment or starting your own business can be a way of using your knowledge and skills to earn money or turn a hobby or passion into a way of life. It also allows you to work flexibly and decide on your workload. For example, you may choose to work part-time or only during certain times of the year, if your venture is solid and bringing in enough income part time then you will most likely consider leaving your existing employment to focus full time on your Self Employed business.
Important things to consider
If you’re thinking about becoming self-employed or starting your own business, there are some important things to consider, especially if your aim is to leave your current employment.
1. Creating a business plan
This should have a careful estimate of anticipated income and expenditure over the first years of your business, based on your market research. You will need this if you have to seek a loan for your start-up costs and it will also be exceptionally useful as a reference point when deciding how best to structure your business, for example, as an employee you pay income tax and National Insurance as a deduction from your wage or salary, when you begin working for yourself you will then need to correctly calculate any tax due and you are then responsible for paying this to H.M. Revenue and Customs. Failure to correctly calculate, report and pay any tax due on time can, and will, result in penalties and surcharges being levied against you. You may consider at this early stage to seek the advice of a reputable Certified or Chartered Accountant who will be able to look at your personal circumstances to ensure you start on the right foot.
2. Financing your business
If you need to borrow money for your start-up costs, consider how much you require and where you will get it from. Banks may not be willing to lend money if you have a poor or no credit rating, or you have no collateral. This may not be an issue in the early days if your Self Employed work is on a part time basis and your current employment can support your day to day expenditure as well as your living costs, however, you will need to clearly evaluate the cash flow of your business before you hand in your notice.
3. Checking taxes and benefits
Make sure you seek advice about how becoming self-employed or starting your own business will affect your taxes and any benefits you receive.
4. Decide upon the structure of your business
Having found yourself an appropriate Accountant make sure you seek advice about the best legal structure for your business. There are many possibilities however the most common one is Self Employed, usually one person working for themselves. As a Self Employed person you own 100% of the profits within your business and are responsible for 100% of the tax payable on those profits even if they remain in the business bank account. If you are starting a business with one or more other people you may choose to structure it as a partnership. It is important to agree the management terms of the business with respect to the percentage split of profits, level of personal drawings and who is responsible for what. This is usually set out within a partnership agreement. When partnership accounts are drawn up the profits are divided between the partners and you will then be responsible for tax upon your share of those profits. Finally, you may decide to incorporate your business and trade as a Limited Company either alone or with others. This can often be highly tax efficient as a Limited Company is an entity in its own right. In the case of most smaller Limited Companies you would, as a Director, pay yourself a salary, you may or may not pay tax and National Insurance from this depending upon how much salary you allocate, this can then be ‘topped up’ with Dividends if the Company is within sufficient profit. Dividends for those earning below the higher rate of income tax would be tax free up to £5,000 and thereafter taxed at a lower rate than standard PAYE. The Company itself would pay Corporation Tax on its profits at a rate of 20% and is set to be reduced to 18% by 2020
5. Running your business
Start as you mean to go on! The key to keeping your business compliant is to ensure that you keep good business records. Few people in this day and age rely on complex books and ledgers but rather opt to use solid accounting software. This is a highly competitive market with a vast array of providers all claiming to be the best. In reality, there is no ‘one size fits all’ and it is strongly advised that you try out the demo versions before you commit to a specific package to make sure it suits your requirements.
Some of the key players include xero, quickbooks, freeagent and sage. All run a cloud based offering on a monthly subscription. There are also some good free options such as wave and quickfile.
Once you have all the key information and tools in place you will then be well positioned for the transition from employment to Self-Employment.