Self-employment: Money and tax essentials

Can I afford to set up a business?

You need to make sure that you calculate how much it is going to cost to start up and run your business to ensure that you have accurate figures in your business plan, especially if you're applying for investment from third parties.

All costs need to be recorded for reporting to HM Revenue and Customs (HMRC) or Companies House (if you are a limited company or a certain type of partnership).

Here is a guide to costs you may incur when setting up your business:

Insurance - You should have business insurance, even if you aren't employing people. If you are employing people you must have employers' liability insurance by law and, if you use a vehicle for your business, you must insure the vehicle and all users of the vehicle.

Although not a legal requirement, if you at any time invite people onto your premises you should get public liability insurance. Also, if you are making, selling or supplying products you should get product liability insurance.

Find an authorised business insurer through the The British Insurance Brokers' Association (BIBA) .

Licences - You may need to have a specific licence to be able to carry out certain business activities in the UK. Find out if you need a licence at GOV.UK - Licences and Licence Applications .

For example, you will need a PPL licence to legally play recorded music in public e.g. a gym, bar, shop, community building etc. PPL licence costs vary depending on your use of the music e.g. to play music in an independent dance class costs from £56.34 a year.

Find out more about where you can find a licence by using the GOV.UK - Licence Finder .

Depending on the type of business, you may also need to factor in costs for accountancy, legal advice, registration with Companies House (costing approximately £15) and premises.

How do I fund a business?

It isn't easy to secure funding for a business, especially during or after a recession. However, the government are introducing new policies to financially support start-ups. To increase your chances of securing funding, put together a strong business plan with sound financial planning and approach the banks for start-up loans.

Some banks have pages on their websites offering advice and guidance on how to write a business plan in order to secure funding:

• Barclays offers information about all aspects of Starting Your Own Business ;
• NatWest recommends free start-up courses as well as funding advice in its Starting a Business  section.

For tips on finding business grants visit Startups - Grants .

You may also be able to secure funding in other ways, such as through a 'business angel' which is like a partner on Dragons' Den. You could sell shares to friends and family or use your own savings to cover the start-up costs. For more on business angels and other ideas, see Startups - Top 10 Ways to Fund Your Business .

For more information on ways to fund your business, see starting your own business - what help is available?.

Do I need to pay tax and National Insurance (NI)?

Depending on the type of business you have started will depend on how you register to pay tax and NI. For example, a limited company will be required to pay Corporation Tax as do some other types of organisations.

Most graduates will begin as self-employed sole traders. You must register as self-employed as soon as you can after starting your business. Starting your business can count as any activity e.g. buying, selling, advertising your business, renting a property or depositing money into a business account with a bank. You will have to send in a Self Assessment form and pay NI even if you make a loss in the first year of trading.

It's important to understand what you are required to pay and when because the penalties for not paying any monies you are responsible for are severe and you are personally liable for these payments.

You must look at the information about the type of self-employment or business you are running and your legal responsibilities and payments due to HMRC. As Self Assessment is done retrospectively, your payments will need to be factored into your business forecasts for the next year.

Registering as self-employed with HMRC

• You must register within the first three months of starting your business. Register online for business taxes where you will be required to give information about yourself and your business.
• Once you have registered HMRC sets up tax records for you online.
• Each year you're required to work out how much Income Tax you need to pay. HMRC will send you a Self Assessment tax return which asks you to detail your income and any other income during a tax year.

National Insurance payments

You normally have to pay NI. Most self-employed registered people pay Class 2 NI but depending on your circumstances you may be exempt from paying. To find out more, visit HMRC - Class 2 National Insurance Contributions .

You may have to pay Class 4 NI if you're self-employed and your profits are over a certain amount (profits above £7,225 as in April 2011/12). To find out more, visit HMRC - Class 4 National Insurance Contributions .

Being employed while self-employed

You can be both employed and self-employed. This is common for people working as freelance artists and designers, particularly in the earlier years of establishing a profitable business.

You need to pay Income Tax and NI for both jobs but they will be done in different ways. As an employee you pay Income Tax and NI through your employer. If you have income from your self-employment you will pay NI and Income Tax through Self Assessment.

In the Self Assessment form you should detail your employment income and tax deducted. HMRC then calculates the tax and NI you need to pay. For an example of how this is worked out see, HMRC - Employed and Self-employed Tax and National Insurance . 

How should I manage my accounts?

You don't necessarily need an accountant to manage your accounts. If you're a sole trader it is manageable on your own but, as it is important that you get your accounts right, you may wish to get advice from an accountant when starting out.

If you are a limited company you can set up on your own but the more complex your business is or high value the venture the more advisable it is to get an accountant from the outset.

Legally you have to keep a record of your accounts each business year so that when you fill out your tax return forms you can prove your figures are right.

The records you need to keep will be dependent upon the type of business you are running. You must keep your records for at least five years and ensure that you have a back-up.

HMRC recommends that you keep the following records which will help you to fill out your tax return:

• cashbooks;
• invoices and receipts;
• electronic sales records or till rolls;
• mileage records;
• bank statements;
• P60s (if you are also employed);
• payroll records (if you have employees);
• rent books;
• hire purchase records;
• an inventory of stock on hand;
• a record of money taken out of the business for personal use.

For more information on record keeping see HMRC - Record Keeping .