If you decide to set up in business on your own the simplest way to start is to be self-employed. This means you are in business as yourself. All you have to do is tell HMRC you have started your own business.
Let’s introduce our fictional business lady, Jane Grey, who has decided to start her own gardening business. She has taken some advice and knows that the easiest way to start her business is to set up as self-employed (a sole trader).
Jane doesn’t have to trade as Jane Grey she could give herself a trade name. She decides to call her business The Lady Gardener and sets up her website and gets some business cards printed. Jane is ready to start trading once she has some income, when she will need to call HMRC and tell them she is in business.
So what taxes and National Insurance will Jane be paying?
- Jane will pay Income Tax on her profits over £11,000 (but less than £43,000) at 20%
- She will pay Income Tax on profits over £43,000 at 40%
- Jane will pay Class 2 National Insurance of £2.80 per week (£145.60 a year)
- Jane will also have to pay Class 4 National Insurance on her profits between £8,060 and £43,000 at 9%
So when you are budgeting for Tax and National Insurance you should look to set aside 30% of your profits.
Jane will pay tax in her first year all in one lump sum on 31 January after she has submitted her tax return. After that, the payments are paid in two instalments in January in the year and July after the year (plus a final payment in January after the tax year).
The main advantage of working as self-employed is that there are no formalities, other than telling HMRC. The main disadvantage is that you are personally liable for anything that goes wrong. If you are Jane Grey the gardener it is unlikely that a customer will sue you (and you can probably get insurance if necessary). If you were going to trade in private medicine providing botox injections to celebrities then you might feel self-employment is not for you!