How to Become Self-Employed: The Fool-Proof Guide

At face-value, self-employment may seem the ideal lifestyle, with more freedom, control and independence than your standard 9-5. However, you should enter this venture knowing that you are likely to work 12 hours a day, 7 days a week for 3 years earning next to nothing before it starts to pay off. It will be extremely hard work, but with enough motivation, the right mindset and good reasons for doing it, self-employment could be the key to your perfect future.

For a smooth transition to the world of self-employment, we recommend you ask yourself the following questions…

What form of trading applies to me?

Depending on whether you choose to become self-employed as a sole trader, the director of a limited company, or operating within an umbrella company, there will be different things to consider.

As a sole trader, you are personally trading as your business which is different to operating as a limited company when the business is its own legal entity. As a sole trader, you and the business are treated as a single entity for tax and administrative services, which means you are ultimately liable for any business losses in the event of anything going wrong. The sole trader route is popular because it is a quick and cheap way to start up a business, also enabling you to test the water by working for yourself should you want to set up a limited company in the future. To operate as a sole trader you must register your self-employed status with HMRC, maintain business accounts and records, and comply with legal requirements that concern the protection of the customer.


Setting up a limited company is the most profitable form of self-employment, as it provides greater tax efficiency and allows freelancers to maximise their take-home wage. A limited company increases financial protection as you are not personally liable for company losses, and also attributes the business with a sense of credibility. Every limited company needs to be registered by Companies House, which only takes a few hours and costs as little as £12. When registered, your business will then be legally protected and Companies House will prevent another company stealing your name.

Working within an Umbrella Company is a great way to benefit from the perks of self-employment without some of the disadvantages, as the Umbrella Company will handle the majority of the admin as an intermediary between you and your clients. Additionally, as you will be paid as a permanent employee, tax and National Insurance Contributions are deducted for you, so there is no need to fill out a return. However, there is likely to be a weekly fee to operate under the Umbrella Company, and you will have to pay more tax than you would as a sole trader.

Do I need financial backing?

Before embarking on your self-employed venture, it is really important to consider whether you will need financial backing to get things up and running. If you do, where will it come from? Perhaps from friends and family, a bank loan or an angel investor? Or maybe elsewhere? Starting conversations, making your case and careful planning will ensure your business is feasible and not short-lived.

Do I set up a business bank account?

Even if you choose to operate as a sole trader, with you and the business being a single entity, it is still important to have a separate account for your business to keep on top of things. Also, it looks more professional to have your business name on cheques and invoices. If you’re likely to hold cash for some time, you should also open a business deposit account to get a little interest on your money.

How will I keep a record of my accounts?

This is extremely important for the success and legality of your self-employment. You need to find an accountant to help you with book-keeping, unless you are confident that you have the time, energy and experience to keep the records yourself. A basic Excel spreadsheet could do the job but only do it yourself if you really know what you are doing. It’s difficult to keep on top of as business starts growing and can be really demanding on your time. Look into software options such as Xero or Quickbooks if you are comfortable with modern tech but a well qualified bookkeeper is worth their weight in gold and can help to keep your business healthy, spotting anomolies and making sure invoices are paid on time or chased up efficiently.

Do I know how to pay income tax?

A key requirement for self-employment is ensuring that you are set up to pay income tax on your earnings. Register your new business with HMRC and ensure you declare your earnings at the end of each fiscal year. This is actually a simple process for a small business owner and can be completed in an hour or less as long as you have kept your books up to date.

Will I be required to pay VAT?

Depending on the nature of your new business, you may be required to pay VAT on goods and services. VAT is charged on things like business sales, hiring or loaning goods to someone, selling business assets, commission, business goods for personal reasons and non-sales like bartering, part-exchange and gifts. Full details regarding VAT are available on the HMRC website.

What location will I use to run my business?

You will need to decide where you will be running your business from. What sort of space will be suitable for the kind of work you will be doing? Working from home has great benefits in terms of convenience and low overheads, but you will need to ensure that your property does not have any rules in place restricting business activity. If you are renting space, an office for example, you should make sure you are aware of the monthly costs outside of initial rental payments, i.e. broadband or electricity.

Do I need to pay business rates on top of council tax?

You may be required to pay business rates on top of your council tax if you have employees working alongside you, in your property. You will definitely be asked to pay business rates if you convert any part of your property into a shop/workshop, or if client visits become a daily occurrence. A phone call with the VOA. (Valuation Office Agency) will confirm whether you need to pay business rates.

Do I need to get additional insurance cover for my business?

When setting up a business at home, you will need to check your insurance policy and will probably have to take out additional cover for any business activity within your household. Most insurance companies will combine any additional cover into one domestic and business policy, therefore it should not be an expensive addition. If your business requires clients to enter your property, you may be advised to take out public liability insurance, a further inexpensive addition to your insurance policy.

Am I eligible to claim benefits or tax credits?

You should check whether you are eligible to claim benefits or tax credits, which is dependent on the income of your new business. Get in touch with an organisation like the Citizens Advice Bureau, who can assist you to work out how much tax credit you could be eligible for.



Becoming self employed and growing your own business can be one of the most rewarding things to do with your life, but it is not for the faint hearted. Do your homework. Ask advice from other business owners around you. Do a comprehensive business plan which can be reviewed by peers and experienced people. Then, if you have the right support around you- GO FOR IT & DON’T LOOK BACK!