“How much tax will I pay?”, “can I claim costs at all?” These are regular questions people ask themselves before they go self-employed. When you are going self-employed, there are numerous factors to take into consideration and a variety of actions to take before you can start running your business. We will take you through the most important steps to keep in mind when you are going self-employed.

Starting up as a sole trader

If you are thinking of becoming a sole trader in the UK, first of all you would have to inform the HRMC (Her Majesty’s Revenue and Customs), which is responsible for the collection of taxes. Through this, HRMC knows that you need to pay tax through self-assessment and pay Class 2 and 4 National Insurance contributions. You can register on the government’s website.

Not unimportant is setting up a business bank account. After you have done that, you should think about establishing a process for recording your profits and evidence of your business’ expenses. This makes completing your HRMC tax return a lot easier.

In case you will be working from home, check your tenancy agreement or mortgage agreement to ensure that you are not contravening any terms. You might be required to inform your landlord or mortgage lender of your decision.

Furthermore, sort out your insurance. Professional indemnity insurance and public liability insurance are the main types of business insurances to consider, however there are plenty of other covers too. If you are thinking of employing people, you are legally obliged to have employers’ liability insurance as well.

Do not forget to think about your pension. Since you will not be paying into a workplace pension anymore, it would be a good idea to set up a private pension in order for you to still put money aside for retirement. Although you will not benefit from employer contributions, you will still get government contributions into your pensions, through tax relief for instance.

How much tax to pay?

This depends on how much money you are generating as well as the ‘allowable expenses’ you have included in the course of your business. Tax-free personal allowance and the tax bands are the same for self-employed and employed people. So in simplistic terms, for 2018/2019 you can make up to £11,850 before you need to pay tax. You will then pay the basic rate of income tax, which is 20%, on income up to £45,350 (£43,350 in Scotland) The higher rate of 40% applies to income over £45,350 (£43,350 in Scotland). On income over £150,000 you pay the additional rate of 45%.

Going self-employed whilst working for a company

You may choose to go self-employed part time, and continue to working for an organisation during other days in the week. This means that you are both employed and self-employed. Therefore, you will pay tax through the Pay As You Earn (PAYE) system as well as the self-assessment. As a sole trader, you may have only one single major client you work for. In this case, HRMC will be keen to make sure that your client is not just calling you ‘self-employed’ to avoid paying National Insurance contributions. To count as self-employed, you usually need to have choice over when and where you work and you will usually be paid when you issue invoices.  You can check here how HMRC will see your employment status

Being self-employed and getting a mortgage

A major disadvantage of going self-employed is that it can be a lot more difficult to get a mortgage. Do not be afraid, it is possible!

When you apply for a mortgage and you are employed, the lender will usually confirm your income by asking for payslips and bank statements. On the other hand, when you are self-employed, you will usually need to provide business accounts including a copy of your tax calculation and tax overview (from HMRC website) .

It will take some time to obtain a mortgage, as lenders often ask for two or three years of accounts. You may not be able to get a mortgage if you have only just become self-employed.

Lenders will usually take an average of your income over the last two to three years to calculate how much they are willing to lend you. They might want to see other documents, too: business plans to give an example. They do this in order to check if you are confident that you are going to keep up with mortgage repayments.

For personal inquiries or specific questions, please do not hesitate to contact us through a phone call or email. The office is open Monday to Friday so feel free to pop in with any further questions! Hopefully you have found this helpful.