Although I have returned to full time work I am still keeping my own business going in my spare time. I was surprised at how easy it is to start a business and so I have held off writing this post for quite a long time to make sure that I haven’t missed anything important…
Please bear in mind that I am certainly not an expert. I just thought you may be interested in what I have found so far in my adventures into self employment…
If you want more details there are loads of websites full of great information out there but I found the best place to start was the Business Link site. This is an official government run website with loads of useful hints and tips on where to start. This site can be a bit daunting as there is such a plethora of info but I regularly find reasons to return here for tidbits to help me clarify certain things.
Anyway the reason for this post is to explain the basics required to get started as a very small business. There is no real reason this should require loads of money, in fact you can get set up as a Sole Trader without any outlay at all.
This is great news if you are just creating a small sideline business. For example buying stuff to sell on eBay, rather than just selling you own used goods…
There are only a few main points to tackle:
- You must register with HMRC as self employed
- Keep track of all of the income and expenses your new business incurs
- Put aside some of your earnings to cover Income Tax and National Insurance
- Start performing Self Assessment Tax Returns, if you don’t already
And that’s basically all you need to do to get started. There are all sorts of other optional items like setting up a bank account but even this isn’t required from the outset as long as you are keeping track of all the financial details along the way.
If you do want to set up a bank account though there are some free options out there. I signed up with Santander who offer a completely free account.
Register As Self Employed
When working for yourself you may be required to set up a direct debit to pay class 2 National Insurance Contributions. This is currently set at £2.65 per week and is paid monthly. If you are not going to earn much then there is a Small Earnings Exception. This is currently set to £5,595, so if you are unlikely to make more than this is a year then you can apply to defer paying this. To do this simply fill in the CF10 Form.
These values are all available from the HMRC National Insurance Contributions page.
This is one of the most important aspects as running a business. You need to be able to account for every penny in, or out, of the business so you must keep all receipts and invoices to allow you to fill in your tax returns at the end of the year. You also need to keep this information for at least 6 years in case anything gets queried at a later date.
This does mean that you are probably going to need some sort of filing system to keep track of all your transactions for each financial year. It doesn’t need to be complicated you could start with a simply folder for each year to keep all of your receipts together. Remember that you probably won’t be filling in the tax return until quite a few months after the year has finished…
To help simplify the self assessment tax return it may be beneficial to enter the transactions into some sort of accounting software. I currently use GnuCash, as it’s completely free and I’ve been using it for ages for my personal finances anyway.
When filing your tax return there is an option to group all of your expenses into a single value, up to a certain amount. Alternatively you can enter values for a selection of categories. You could then group expenses into the appropriate categories within your accounting software. This will give you a helping hand when you are filling in the tax return later.
The categories are as follows:
- Costs of goods bought for resale or goods used
- Car, van and travel expenses
- Wages, salaries and other staff costs (Only applies if you employ other people so this probably won’t apply)
- Rent, rates, power and insurance costs
- Repairs and renewals of property and equipment
- Accountancy, legal and other professional fees
- Interest and bank and credit card etc. financial charges
- Phone, fax, stationery and other office costs
- Other allowable business expenses
You must bear in mind though that not all expenses are allowed! If you entertain a client for example then you can physically take it out of the business but you cannot take the value of your income when working out the tax applicable.
One last thing to consider are Capital Expenses. This covers larger purchases that retain some value for several years, including furniture, tools, computer hardware and even some software, only packages that will last for a few years though. The official definition is:
Fixed assets or intangibles, such as goodwill, which last for several years
You can claim back some capital expenses but these are entered separately when you file a tax return so it is a good idea to keep the transactions separate. The current allowance is £25,000 in a year which is far more than you be dreaming about pumping into a very small enterprise anyway.
Put Aside Money For Tax
Not all of the money you receive is yours. As with standard employment you will be taxed on your income. The basic level of income tax is 20% but there is also another 9% required for National Insurance.
There is an allowance which doesn’t incur tax but rather than working out the exact amount of tax you are likely to be paying I find it easier to set aside the whole amount and then you should have a bit extra to plough back into the business the following year. You only get this allowance once though so if you are still employed then this allowance will already be taken into account in your PAYE payments from your employer and so you will be liable for the full tax on any extra income you make.
Self Assessment Tax Returns
If you already have to perform self assessment tax returns then you will just have to fill in an extra section for self employment. If you do not currently have to file a tax return then unfortunately this is something that you will have to start doing once you become self-employed.
It isn’t too bad, especially if you fill it out online, but it can take a while to work out all of the values and fill in the form. As long as you have been keeping detailed records of everything then you shouldn’t have anything to worry about. You just need to set aside a little bit of time to actually fill out all the appropriate sections of the form…
As advantage of filing online is that you can leave it at any stage in the process and the values will be stored. This allow you to go back at any time and continue where you left off.
Anyway I hope this encourages you to start a little side business. If you do then please let me know how you get on…
Image: Pete O’Shea