It’s pretty straightforward if you work for someone else. You are employed, and they pay you after deducting tax and national insurance. If you are thinking about working for yourself, it is important to decide whether you want to work alone as a sole trader, form a partnership, or set up a company. There are financial implications to consider and, whichever way you work, it is wise to talk to the Inland Revenue. Here we spell out some of the pros and cons of different ways to work.
The simplest way to start out is to register as self employed. Call the Inland Revenue within three months of starting your business. When you are self employed, you received all the income and profits from your business, and you are responsible for debts if the business fails. You will also need Professional freelance insurance such as Aon. You are taxed on the profits your business makes, but can claim your business expenses against your tax. If your income is low you can request to be exempt from National Insurance payments, but it is wise to make voluntary class two payments of just a few pounds each week, to retain your entitlement to benefits such as maternity allowance.
If you plan to work with someone else, you are ‘in partnership’. Get a solicitor to draw up an agreement outlining how the business is shared. You are likely to still need to register as self employed, and have the same responsibilities and benefits as above. Profits are shared as you have agreed in the document forming the partnership.
Limited liability partnership is a relatively new arrangement that means your personal assets are not at stake if the business fails. Similar to registering a company, you have to register limited liability partnerships at Companies House.
You may want to set up a limited liability company. Register at Companies House for this. There are many firms who will set up a company for you for a fee, in the region of a couple of hundred pounds. Some enterprise agencies can provide assistance too. Running your business as a company protects your personal assets if the business fails. You would be employed by the company, and taxed through PAYE on your income. You will probably also have shares in the company and receive dividends on the profits. If operating as a company, you do need an accountant, and have to submit annual accounts to Companies House. You will be a company director. A company can be sold more easily than if you are in business as a sole trader.
This post is in association with Aon