A small business guide to self employment

By Tim Adler on Small Business UK - Advice and Ideas for UK Small Businesses and SMEs

Self-employment is still a valid route, despite a drop in the number of people going into their own business post-pandemic. Indeed, three quarters of all British businesses have no other employees. As of October 2023, 4.1m of the UK’s 5.5m small businesses had no employees apart from themselves.

And the number of self-employed businesses has grown by 14 per cent since 2010.

Jobs for life tend to be a rarity these days, and this uncertainty has led to many people moving towards having more control over their own lives and finances.

Jump to the section you’re most interested in or read on for the full guide.

1. Different types of self-employment
2. Sole trader
3. Partnership
4. Limited company
5. Limited liability partnerships
6. Limited partnerships
7. Which kind of self-employment is right for you?
8. The reality of self-employment

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Different types of self-employment

It’s important to define which is best for you before you start a business. It can affect things such as the tax rates you need to pay, how you are able to take money from the company, and your responsibilities and liabilities in the event of a loss, as well as which paperwork needs to be completed.

Sole trader

A sole trader is more straightforward self-employment. It can mean some extra risk to the business because you are personally responsible for all your business debts if it fails.

It can also make you more personally accountable in the event of a lawsuit. As a limited company, it is the company which is being sued but, as a sole trader, you yourself could be in the dock.

However, if it’s a low-cost business that is unlikely to incur any debts or cause any personal or financial damage to another party, then a sole trader might be the right choice for you.

But if you’re likely to incur any significant debts or legal risks, the financial protection offered by becoming incorporated and forming a limited company would be advisable.

Sole traders get to keep all their business profits after tax has been paid on them.

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Setting up as a sole trader

Setting up as a sole trader is relatively straightforward. Go ahead and register for self-assessment with HMRC. To become a sole trader, you must register using the government portal within three months of founding your business.

Technically speaking, you don’t need to register as a sole trader unless the income you earn from self-employment is more than the tax-free allowance, which currently stands at £1,000.

For example, if you’re in full-time employment, but do paid-for gardening on the side, you won’t need to tell HMRC, providing your self-employed earnings are less than £1,000.

If you think you’ll earn more than this, the deadline to register for self-assessment is October 5 in your second tax year of trading.

Tax-free allowance

Your personal allowance for tax-free income in 2023/24 and 2024/25 is £12,570. Anything above this will be subject to corporation tax (19 per cent on anything between £12,570 and £50,000).

National Insurance contributions

If you’re a sole trader in self-employment, you must also pay National Insurance (NI) contributions if you have profits above £12,570 or more a year. They’ve been reformed in the Autumn Statement 2023 and the Spring Budget 2024.

Class 2 National Insurance Contributions will no longer be compulsory from April 6, 2024. Class 4 NI contributions, meanwhile, will be paid at 6 per cent of the profits you make up to £50,270 (and a further 2 per cent on any more profits over that).

Partnership

A partnership is when a business is owned by more than one person, where they are all responsible for the growth of the company.

These partners are also liable for any losses made by the company, as well as bills for anything the company owes money on.

Profits are shared out between all partners and individual tax and NI is paid by each partner. Partners can be people or companies.

One person is nominated for the responsibility of accountancy for the partnership.

Setting up as a partnership

The person who was nominated for the responsibility of accountancy will have to register the partnership with the HMRC.

All partners will need to register for self-assessment, so that they can pay NI and tax on their portions of the profits.

You will need to register your partnership within the same time frame as a sole trader.

Limited company

A limited company is a form of business that separates the people that own and run a business from the business itself, making it its own entity.

With a limited company, shares are held by the individuals and profits are owned by the company itself after the company pays corporation tax.

These profits are then shared out with the shareholders. Shares in the company can be bought and sold.

The term limited comes from the idea that the company is “limited” by its shares. At formation, a company might issue 100 shares at £1 each and these shares are paid for in full by four shareholders at 25 shares each.

However, if these 25 shares each aren’t paid for in full and the company goes bust, the company directors are only responsible for paying the value of its remaining unpaid shares.

Usually, directors own shares in a limited company but this isn’t necessary. Directors are responsible for running a limited company and this can be anyone.

Providing the law has not been broken, company directors aren’t made responsible for the business debts if the company makes a loss.

Setting up a limited company

The limited company must register itself at Companies House and give HMRC a date for when the business officially starts running. If the company expects to take more than £85,000 per year (£90,000 from April 1, 2024) it must also register for VAT.

Every year the company must also provide statutory accounts to HMRC that comply with either UK Generally Accepted Accounting Practice or International Financial Reporting Standards.

An annual return must be sent to Companies House and HMRC must receive a Company Tax Return.

Directors must fill in a self-assessment tax return and, if a salary is paid, pay NI and tax through PAYE.

Limited liability partnerships

Partners in limited liability partnerships aren’t personally liable for debts incurred. As with limited companies, their liability is limited to the money invested into the business at the business in the beginning.

Limited partnerships

Liability for debts is split into two categories. The debts of “general” partners and the debts of “limited” partners.

General partners are liable for all debts incurred whereas limited partners only need to pay the amount initially invested in the business, just like with limited companies.

Setting it up

Visit this Companies House link to find out more about setting up this kind of partnership company.

Which kind of self-employment is right for you?

Choosing the right legal status for your company is important to get right. There are pros and cons to all of them.

Some structures may seem more dynamic and flexible than others. Some will offer more protection than others. Some will come with more bureaucracy and other headaches.

If you’re unsure, in some cases it may be best to start off as a sole trader and, when things start getting serious, you can incorporate your business.

The reality of self-employment

In 2022, the London School of Economics reported that more than 40 per cent of those in self-employment earned less than £12,000 a year.

The truth of self-employment is that, unlike being an employee, you never really switch off. Running your own business means that you are captain of your own ship and not answerable to anybody. That is a huge psychological freedom compared to being stuck in a job you hate.

More on self-employment

Becoming self-employed – Becoming self-employed could mean less income, more responsibility and working longer hours. But freedom and independence cannot be underestimated, says Margaret Wood

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