What Do I Need to Know About Being Self-Employed?
There were over 4.8 million self-employed people in the UK in 2016. With the growth from 3.2 million at the turn of the century, self-employment is fast becoming a popular business option. However, taking the plunge to start your own business and turn it into your main income stream can be daunting. If only it were as simple as just diving in and instantly achieving all your business dreams overnight. Unfortunately for those at the not-so-patient end of the spectrum, a high degree of consideration and planning is required to become successfully self-employed. Here are three questions you should consider before you begin.
What makes a good candidate for self-employment?
First and foremost, you need a solid business idea. Once this is clear, setting up your business will be much smoother.
To increase the likelihood of turning your business into a profitable one, certain characteristics will stand aspiring self-employers in good stead:
- Be decisive – as your own boss, you will need to be able to make and stick to decisions.
- Show commitment – self-employment is tricky, you need to be dedicated your goals.
- Be able to ‘switch off’ – being self-employed means you don’t have scheduled hours. Taking time off to relax is key to enjoying and prospering in self-employment.
- Network – connecting with others is paramount to business success.
What are the key decisions you need to make?
A big decision is what kind of self-employment is best for you. There are three types:
Sole Trader: you are the exclusive owner of the business and keep all profits following tax, but are also liable for losses and personally accountable in the event of a lawsuit. Any profits made (sales minus costs), up until the 5th April every year, are declared on your annual self-assessment tax return and classed as your income for that year, even if it is not paid as salary. You will need to pay income tax and national insurance on your income at the standard income tax rates.
Partnership: two or more people run the business; share the profits and losses, and are equally responsible for the company’s growth. Each partner contributes to all elements of the business, from money to labour to skill. All of the partners own a percentage of the profits, and so they pay tax on their percentage. Similar to a sole trader, each partner’s own share of profits is their personal income.
Limited company: the main reason people set up limited companies is to protect themselves from personal responsibility for the debt of the business. Owners are protected by ‘limited liability’, whereby they are only responsible for debts up to the value of their investments. Unlike sole traders, the personal and business finances are kept separate. You will have to register to pay tax on your company income, which has lower rates than personal income tax, and you will receive income from both salary and dividends.
Financial management must be a key consideration. Self-employed people need to have enough money to live on as well as enough to start up the business. Hiring an accountant to keep on top of your finances will help to take the pressure off you and let you focus on your business. The Fabulous Group are committed to giving you the functionality, approach and support of a head office to help you get your business off the ground, and our services flex as your business grows.
Part-time or full-time? Part-time self-employment grew by 88% between 2001 and 2015, compared to 25% for full-time. However, whilst part-time appears to be more popular, you will need to make this decision based on your financial and business goals.
What are the pros and cons of self-employment?
Is the grass always greener? The thought of being your own boss could be enough to sweep you off your feet. However, there are pros and cons to being self-employed. Considering these will help you make your decision about whether self-employment suits your circumstances.
- Freedom of being able to fit your working hours around your social life and family.
- People that you work for are your clients, not your employers – you can direct your own work.
- Personal rewards of seeing your company thrive.
- Financial rewards – with the right mindset and course of action, your business could become highly profitable.
- Less employment security.
- As you pay your own wages, you lose earnings for holidays and have to fund your own pension.
- The division between work and home time becomes less visible with self-employment.
Serious planning is required to make self-employment successful. Thankfully, being in business for yourself doesn’t have to mean being in business by yourself. At Fabulous Financial, we offer more than the services of an accountant: we become an extension of your own team. For further advice, contact us to arrange to meet for a coffee and discuss your self-employment plans.