Business Self employed

Preparing for Your First Year as a Self-Employed Person – 5 Important Things

First year self-employed UK - Lidertax accounting office UK

Congratulations! You’ve made the difficult decision to become self-employed. Now what? Well, have created a list of 5 important things you need to do to get started. This things will make sure that your first year as a self-employed person is as successful as possible.

From registering with HMRC ASAP to ensuring you have the right insurance, these tips will help you get off to a flying start. So take out your diary, start making notes and get ready to make some progress in your self-employment journey!

In this article we will answer a few most common questions: 

  • Do you pay tax first year self-employed?
  • How do I pay tax on self-employed income?
  • How do I prove my income first year self-employed?
  • Do I need to register with HMRC if I earn less than 1000?
  • Is it worth going self-employed?

5 Key Things to Do When You’re Self-Employed:

1. Register With HMRC ASAP

Starting your business from the ground up can be daunting, but it can be a rewarding experience with the right preparation. As a self-employed business person, you first need to either register as a sole trader.

Starting as a Self-Employed (sole trader):

If you register as a sole trader, then you’ll be the business’s exclusive owner and keep all the profits. However, then you will also be liable for all the losses, if any. To register as a sole trader, you need to tell HMRC you’re self-employed.

You will have to register with the HMRC, and you can do this at any time up to the 5th of October of your business’ 2nd tax year. A tax year lasts from 6th April to 5th April of the next year. For instance, if you work as a sole trader in January 2022, you have to register with HMRC by 5th October 2022.

Additionally, you will have to be responsible for a self-assessment tax return every year. This means calculating and paying the taxes and National Insurance Contributions every year. Here’s the information on how to register as a sole trader. Most businesses hire accountants to prepare their tax accounts. Accountants also keep transaction records and calculate the tax amount required to be paid at the end of the year.

Self-Employed National Insurance

Self-employed National Insurance is an yearly obligation that self-employed people must pay. Keeping track of all the paperwork can be a little tedious and challenging. However, it’s important to stay on top of your finances.

As a self-employed business person, you will have to pay two kinds of self-employed National Insurance Contributions (NICs):

  • Class 2 NIC: You pay this one if your annual profits are equal to or more than £6,725 (the amount is £3.15 a week for the year). However, if the income is below the set threshold, you don’t pay any Class 2 National Insurance Contributions.
  • Class 4 NIC: You pay this one if your annual profits are between £11,909 and £50,270 and 3.25% on profits over £50,270.

Remember, these are the rates for the 2022 to 2023 tax year. Check the most recent tax rates for these two classes here.

2. Open Your Business Bank Account

When the money starts flowing into your business, a personal bank account won’t work. This is because its policies are not designed to be business-friendly. Therefore, it’s preferable if you register a business bank account. Furthermore, even though your income will be taxed along with your personal tax. It is imperative to keep the personal and business finances and records separate. Although no law/rules clearly state having a business account is mandatory for a self-employed person, having a business one will make your accountant’s job easier.

Therefore, we suggest opening a separate business bank account and if you’re worried about the fees, don’t. Small business bank accounts don’t have high fees. They typically range from 6 to 10 a month, along with some small transaction fees.

Most businesses go with high street banks that offer free 12 to 18 months of business banking. However, there are some new players on the block. These new banks like Cashplus and Tide offer complete free business accounts and are specifically great for online banking.

If you have an average credit history or even a little lower than that, you can look towards these banks. They’ll likely approve your business account and fulfill your banking requirements.

Lastly, we suggest opening the bank account in the name of your business and not your personal name. It looks more professional to have your company’s name printed on the invoices and cheques.

3. Will You Pay VAT?

It can be overwhelming to start your business and try figuring out the tax obligations. Nevertheless, it’s all worth it in the end. With that said, there are some questions to ask yourself before you even start.

  • Will you need to pay tax?
  • What are the formalities involved?
  • Do you need to make any preparations early on in the year?

All of these questions and more can be answered by consulting a tax professional.

However, if you’re self-employed, you need to remember that a business with an annual turnover of more than or equal to £85.000 in the last 12 months must register for VAT. Or, if you expect the turnover to cross £85,000, then register within 30 days.

Furthermore, you have to register regardless of the VAT taxable threshold if you:

  • Live outside of the UK
  • Your business is outside of the UK
  • You offer services and goods to the UK

Here are some more important considerations you need to consider to decide whether you’ll need to pay VAT.

Even if you don’t have to pay VAT, you may still want to decide to register for it. This is because having a VAT number gives you credibility. Plus, you can claim the VAT back on any eligible purchases you make. You can consider going for the flat rate VAT scheme. Here you pay a fixed VAT and keep the difference between what you charged the customers and paid to HMRC.

Make sure you have handy all the proper documentation and information needed for filing taxes this year. This will ensure that everything in your tax registration journey goes smoothly when it comes time to file. Starting your own business can be a reality with a little bit of planning and effort!

4. Get The Right Insurance

It can be a challenging to start a business without knowing what kind of losses might be coming your way. However, with the right preparation and planning, it can be a rewarding experience. Get insurance coverage to ensure your business is protected from unforeseen losses.

The most common business insurance coverage types to consider are public and employers liability insurance and professional indemnity insurance.

  • Employer’s Liability Insurance: This policy provides coverage for you, your employees, and the company if someone is injured on the job. The government requires liability insurance in order issue a business license. You need at least £5 million coverage which is a standard. Make sure to display the insurance certificate where your employees can easily read it.
  • Professional Indemnity Insurance: It covers professional risks, such as if a customer sues you for unsatisfactory work or advice you provided.
  • Public Liability Insurance: It covers you and your business if someone is injured while at your business place. Or if your business activities lead to damages to a third party’s property.

There are many more business insurance coverage types, but these are the most commonly used for small businesses.

5. Keep Your Financial Records Properly Maintained

Keeping accurate financial records is essential for both personal and business tax filings. Make sure to track all income, expenses, and loans used in your business. Keep copies of receipts for items such as office supplies, advertising costs, and labor costs. Record the date of purchase or contract signing where possible.

At the same time, it is super important to be realistic when forecasting future income and expenses. These can easily outstrip actual results if not accounted for in advance. Use a cash flow analysis tool like QuickBooks to help you stay on top of your finances and make smart decisions accordingly!

You can also hire an accountancy firm to take care of all of the financial record maintenance while you can focus on what you do the best; running your business!

Parting Thoughts:

To successfully operate a business, it is essential to keep accurate financial records. This will allow you to file taxes as well as assess your insurance needs correctly. Additionally, hiring an accountant can help you manage your finances, file taxes on time, pay your NIC obligations and stay on top of future trends.