Here, specialist contractor accountants Brookson looks at some of the issues to be considered when deciding to 'go it alone'.
Being self-employed or starting your own business brings a lot of freedom and many rewards, but it also comes with responsibilities. Not only are you responsible for drumming up your own business and developing client relationships, but you’re also obliged to take care of your own payroll, administration and tax affairs.
Going solo doesn’t have to be scary – one of the best things you can do is to plan effectively and give yourself a sense of direction from the start.
Here are some of the most important things to think about before you take the plunge.
Probably the first important decision you need to make is which way of working is right for you. It’s a question of balancing the risk and responsibility that you’re prepared to accept. Finding a specialist contractor or freelancer accountant who can advise you on choosing a working option that best fits your circumstances is a great starting point.
Often those new to working as a contractor or freelancer may choose to work through an umbrella company, meaning you’ll be taxed like any other member of staff. This frees you of any of responsibility for your own tax, payroll or reporting practices and offers you all of the protection in place for other employees – but this is often less financially rewarding compared to running your own business.
Setting up as a sole trader is the simplest way to become your own boss and has the cheapest running costs. However it does not come with the same legal protections as a limited company.
Alternatively, you could choose to setup a limited company, which may be considered the most complex and comes with higher operating costs, but it provides better legal protection and is very tax-efficient, allowing you to access a higher percentage of your take home pay.
To help you get to grips with the different options open to you, download our free guide to working options.
If your decision is to work through an umbrella company, the provider will do everything for you. However, if you work as a sole trader or through a limited company, you’ll need to register with HMRC within three months of becoming self-employed. Sole traders will need to register for Self-Assessment tax returns with HMRC as soon as they begin looking for work, even if they do not take on their first customer straight away.
Limited companies need to be registered with Companies House. To do this, you’ll need to name yourself as both director and shareholder on the paperwork, as well as providing a ‘Memorandum of Association’ containing details of the company’s shares. ‘Articles of association’ are also required, which is the company's internal rulebook for how the company is run, you can find examples of these available on the Companies House website.
Setting up a business bank account is compulsory for those choosing to run a limited company and is advisable if you are working as a sole trader, to help keep your personal and business finances separate.
Pensions and protection
Now you’re self-employed, your income is more uncertain and as a limited company or sole trader, you won’t get paid holidays, sick pay or those other statutory employee rights.
Benefits such as pensions and insurance that might have come with your old job are now your responsibility too, so it’s a good idea to start thinking about these as early as possible.
Stakeholder pensions and self-invested personal pensions are just some of the options available to you, so do your research and contact a financial adviser to help you make the right decision for your personal circumstances.
Setting up a pension when running your own limited company can be a good way to offset your personal tax liability.
Depending on your chosen working option, you will be required by law to have certain types of business insurance in place. Other types of insurance are not compulsory but it is important to consider which ones are appropriate.
If you work through an umbrella company, business insurance is automatically included by your provider. However, if you are working through a limited company or as a sole trader, the types of insurance you may need are:
- Employer’s liability – If you employ other people you must have this insurance. This provides cover for any claims made by employees who are injured or become ill as a result of their employment.
- Public liability – If you are visiting a client’s site. This provides cover against claims by members of the public who have been injured or had property damaged as a result of carelessness at work by you or your employees.
- Professional indemnity – If you design, advise or implement you must have this insurance. This provides cover for the financial consequences of professional negligence, following a breach of professional duty by way of neglect, error or omission.
- Directors and Officers Liability – This will often cover Employment Practices Liability. It covers harassment and discrimination claims and legislative breaches. If you are a director of your own company, it is strongly recommended that you hold this cover.
- Health and accident – If you are injured as a result of an occupational accident and are unable to work. This cover will pay a regular income or lump sum if you are unable to work because of an accident or sickness.
- Vehicles insurance - Vehicles used for business purposes must be insured even if already insured for private use.
What’s in a name?
As a limited company or sole trader, before your company can be officially registered, you need to decide on a trading name. The name of your business needs to send a message to potential customers and partners.
What this should be depends largely on the industry you’re in – in some sectors it might be considered more professional for a single self-employed professional to trade under their own name, while others may prefer something more creative. Have a look around at similar contractors in your industry to get a sense of what’s expected.
There are also some legal concerns to think about – you’ll find further ideas on choosing a company name here.
Susie Hughes © Shout99 2013