How does self-employment work?

With all the know-how available to you, it can be a straightforward process that allows you to take control of your work. Additionally, learning the benefits or drawbacks can help you ensure it’s right for you.

This guide answers “how does self-employment work?” which includes:

• Registering
• Taxes
• Advantages
• Disadvantages

Find the answers to “how does self-employment work?”

Registering

To answer “how does self-employment work?” you need to understand how you can register your new status with the government. As soon as you begin to work for yourself, you are self-employed.

But the HMRC will only consider you self-employed if you’re a sole trader because if your business is a limited company, you’re an owner instead. You can still be employed and self-employed, though.

For example, you could work for a company during the day and run your business in the evenings.

Tell the UK Government you’re self-employed by registering as a sole trader through their portal .

You should register straight away if you earn more than £1000 from self-employment over the tax year. There are also additional tax responsibilities that you take on, that you may not deal with when working for employers.

Taxes

When figuring out how self-employment works, you also need to change how you view taxation. Your employer will likely sort most of your taxes or assist you with them when you’re employed.

As a self-employed person, you’re solely responsible for them. If you don’t pay what you should, you could face fines or criminal prosecutions. The HMRC has the right to seize your assets to pay off what you owe.

Your assets are things that the business owns, like equipment or vehicles. But as a sole trader, there’s no legal distinction between you and your company. That means you can also see personal property taken.

VAT

If your business earns more than £85,000 a year, you must register for VAT. You can do so through the UK Government portal, which will ask you to provide information like your turnover, business activity and bank details .

You can also reclaim the VAT back on purchases your business makes, like for supplies or equipment.

National Insurance

When you’re self-employed, you are in either one of these classes for National Insurance:

• Class 2 — if you earn a profit of more than £6,725.
• Class 3 — if you earn less than £6,725 but want to contribute voluntarily to avoid gaps in your record.
• Class 4 — if you make a profit of more than £9,881 a year.

You can pay your National Insurance alongside your income tax in your Self Assessments.

Self Assessments

As a self-employed person, you must file an income tax Self Assessment at the end of each tax year. You can do that through the UK Government portal , but you’ll need to keep your records in order.

That means you need to hold onto bank statements and receipts of what you earn or spend throughout the year. It can be a time-consuming process for new sole traders.

Countingup is a business account with built-in accounting software, which can make Self Assessments easier. It has a tax estimates feature that tells you how much to put aside each month, so you’re ready before the end of the year.

Advantages

To answer “how does self-employment work?” it’s likely helpful to know the advantages of the status.

Freedom

An obvious benefit might be the freedom you get when you can make your own choices.

Still, there are specific industries where that’s more important. For creative or design businesses, that could mean taking more risks to make your vision come to life.

Work-life balance

A significant draw could be choosing your hours, meaning you fit your work around your life. So if you’d like to spend more time with your family or friends, you don’t have a boss you need to ask.

Potential earnings

Something which attracts people to become self-employed is the potential earnings that you could have. It’s your business, so you can choose your salary and pay yourself more as your business grows.

In employment, you’ll likely have less choice on how much you make. Even if you work in similar roles to others, you could earn less depending on the company or location.

Job satisfaction

If you build a business yourself, likely, you’ll already be more motivated to work hard. That’s because you will be able to see the benefits of your efforts quickly.

In employment, some companies are late to acknowledge their workers for their successes. That can mean people are less motivated to push themselves and don’t feel satisfied in their roles.

Disadvantages

Before you decide to become self-employed, it’s crucial to look at the potential disadvantages. These can help you make the right choice for your situation.

No employee benefits

An apparent downside to self-employment is the lack of employee benefits. In particular, these include things like sick or holiday pay, which you won’t get if your business relies on you to function.

The only way to resolve that problem is likely to be to set aside money for yourself if you become sick or would like to take a holiday.

No income security

Another major disadvantage could be the lack of security with self-employment. Your business can go through a period of no sales, which would mean you wouldn’t be able to earn anything.

Companies that employ you can also face problems and let you go or cut your hours. But if it’s an established business with a high turnover, it’s more secure than your new one.

Unlimited liability

As a sole trader, you have unlimited liability for your business. That means you and your operation are the same legal entity. So you would be liable for any debts the business faces.

As mentioned earlier, that applies to taxes but also suppliers or lenders. You could lose your home or personal car to pay off that business debt, which is not something you need to worry about working for an employer.

To get limited liability, you can turn your sole trader business into a limited company. Which would mean you’d only be liable to lose the money you put into it.

Manage your costs with Countingup

Keep an eye on your accounts to avoid issues with mismanagement of your business finances.

Countingup, the business account with built-in accounting software can make that more accessible than ever. You’ll receive cash flow insights through your phone to monitor the money in or out.

Get started for free.