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How to become self employed in the UK

February 23, 2023

Becoming self-employed can be a great way to gain flexibility and control over your work-life balance, as well as the opportunity to be your own boss.

However, it also comes with its own set of responsibilities, such as taxes, insurance, and accounting.

In this article, we're going to talk through the information you need to get started. From registering with HMRC, setting up a business bank account, and obtaining insurance, we’re covering all the important steps you need.

7 simple steps: How to become self-employed

  1. Step 1 - Choose a legal structure
  2. Step 2 - Know your numbers for business planning
  3. Step 3 - Get a dedicated bank account in place
  4. Step 4 - Workout how to keep business & finance records
  5. Step 5 - Decide whether to be VAT registered or not
  6. Step 6 - Organise your workspace
  7. Step 7 - Set up the right business insurance for being self employed


Read on for more information about what you need to do for each step.

Step 1 - Choose a legal structure

Starting a business is an exciting journey, but one of the first decisions you'll need to make is choosing the right legal structure for your company.

The most common options are being a sole trader or a limited company. But, what's the difference between the two?

What is a Sole Trader?

This is when an individual operates as the sole owner of their business. It’s the simplest business structure so it’s also the most common. Sole Traders account for 4.175m businesses in the UK out of a total of 5.583m SMEs which in turn account for 99.9% of all businesses.1


  • Setting up as a sole trader is easy and requires no paperwork except a Self Assessment tax return every year 
  • Unlike incorporated businesses, whose details are available on Companies House, sole traders have much more privacy


  • There's no legal distinction between the business and the sole trader meaning there is unlimited liability i.e. personal assets are at risk from outstanding debt
  • Raising finance can be challenging for sole traders as banks and other investors tend to prefer limited companies
  • Tax rates for sole traders are not typically as favourable as those for limited companies once a certain level of earnings is reached

What is a limited company?

A limited company is a form of business organization where the company has a separate legal identity from its shareholders and directors.

This separation remains even when the company is run by a single individual, who acts as both the sole shareholder and director of the company.


  • A limited company is legally distinct from its business owner i.e. it has limited liability
  • The personal assets of the business owner are not at risk as the liability is limited to the amount invested in the company
  • The registered company name is exclusive to the limited company and cannot be used by others, unlike sole trader businesses

In general, limited companies tend to be more tax efficient than sole traders, as they pay corporation tax on their profits instead of income tax.

This often results in a more favourable tax rate, making it more profitable to form a limited company. Additionally, limited companies have access to a wider range of tax deductions and allowances that they can claim against their profits.


  • A limited company has additional responsibilities (known as the director's fiduciary responsibilities) which outline the legal obligations of all company directors
  • An annual company tax return must be filed without fail, along with the financial accounts
  • Forming a limited company is more costly and time-consuming, as extra paperwork must be handled either by the business owner or by hiring an accountant
  • Information about the business, including details on directors and earnings, is publicly available through Companies House, which may not be desirable for some small business owners

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Step 2 – Know your numbers for business planning

Business planning is vital for anyone looking to start and grow a business. A well-written and thorough business plan provides a roadmap and helps to ensure that you stay on track and reach your goals.

To do this properly your business plan needs to include the costs and prices of things.

If not, your planning will be based on what you think rather than what you know. Imagine working your socks off only to find out you’re not making any money.

This is very important because it:

  1. Provides a clear roadmap that outlines your financial goals and milestones
  2. Helps secure funding by offering accurate financial projections
  3. Enables informed decisions by better understanding the risks and rewards
  4. Allows you to set specific, measurable targets that are attainable
  5. Enables forecasting and budgeting.

But, the importance of knowing your numbers doesn’t stop there. You also need to be able to price your goods and services for growth.

Pricing for margin means including all the cost of goods or services, overhead costs, and desired profit margin in your calculations.

  1. Calculate cost of goods or services: add up all direct expenses (e.g. materials, labour) associated with delivering the product or service to a customer;
  2. Add for overhead costs: include an amount for indirect expenses (e.g. rent, utilities, insurance) i.e. usually calculated as a percentage of the total monthly bill
  3. Determine desired profit margin: the percentage of profit you want to make from each sale;
  4. Calculate selling price: Add the cost of goods or services and overhead costs, then divide by (1 - desired profit margin as a decimal).

For example:

Suppose you have a cost of goods or services of £100, overhead costs of £50, and you want a profit margin of 20%.

Selling price = (£100 + £50) / (1 - 0.2) = £125.

Once you know your selling price, you can determine the sales volume needed to hit your desired revenue and income targets.

What’s more, this kind of insight enables you to shop around for the best deal on raw materials and stock which is just as important for maximising profits.

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Step 3 - decide whether to be VAT registered or not

VAT is a tax that’s applied to most goods and services in the UK.

To sell your goods and services with VAT included, you need to become ‘VAT registered’ at the HMRC.

In order to be eligible for VAT registration in the UK, a business must meet certain criteria which is best explained on the UK government website.

Once a business is VAT registered, it must keep detailed records of all VAT-related transactions, including sales invoices and receipts for purchases, and file regular VAT returns with HMRC.

The VAT return must show the VAT charged on sales and the VAT claimed on purchases, and the business must pay the net amount to HMRC. A qualified accountant is often tasked to do this for a business.

Pros of being VAT registered in the UK:

  • You can claim back VAT on business expenses
  • Being VAT registered can increase credibility with customers and suppliers
  • If you’re VAT registered and your customers are also VAT registered, they can also claim back the VAT they paid to you on their VAT return

Cons of being VAT registered in the UK:

  • You need to keep detailed records of all VAT-related transactions
  • You’re required to file VAT returns and make payments to HM Revenue and Customs (HMRC) on a regular basis
  • The administrative burden of VAT registration, compliance and record-keeping can be significant and can be costly, especially for small businesses.

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Step 4 - get a bank account in place

If you're becoming self-employed, having a bank account is crucial, least not, for getting paid!

Whether you're legally required to have a separate business bank account depends on your legal structure.

As a sole trader, you can use your personal bank account for both business and personal transactions, or set up a second personal account for your business. However, keep in mind that your bank's terms and conditions may prohibit using a personal account for business transactions. It's a good idea to separate your business finances from your personal ones.

A limited company, on the other hand, being a separate legal entity is required by law to have its own business bank account.

How do business bank accounts work?

A business bank account operates similarly to a personal current account. You can use it for transactions such as receiving and sending money, setting up recurring payments, paying for goods and services online and in-person, and more.

The main difference is that business accounts usually charge a monthly fee.

What do I need to open a business bank account in the UK?

To open a business bank account, you’ll have to provide verification of the identity and address for anyone who has access to the account or owns a portion of the business (usually at least 25%).

Proof of ID documents

  • Driver’s licence
  • Passport

Proof of UK address

  • Proof of personal address: recent bank statement or council tax bill
  • Proof of a business address (if you have one): recent utility bill or documentation from HM Revenue & Customs (HMRC)

Other verifications

Some banks like to see:

  • Companies House number or incorporation certificate
  • Unique Taxpayer Reference (UTR) or your National Insurance number

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Step 5 - organise how to keep business & finance records

According to the UK government's website, the records you need to keep when self-employed are:

  • All sales and income
  • All business expenses
  • VAT records if you’re registered for VAT
  • PAYE records if you employ people
  • Records about your personal income
  • Information on grants e.g. if you claimed through the Self-Employment Income Support Scheme

You don't need to send these in when submitting a tax return but you need to keep them for:

  • Working out your profit or loss for your tax return
  • Showing HMRC if asked

And, you must make sure your records are accurate and kept for five years after the 31st January deadline of the relevant tax year.

In other words, you definitely need a reliable accounting method.

Most sole traders with an income less £150,000 use 'cash basis reporting' - that is, recording income or expenses when you receive money or pay a bill.

The best way to 'account' for this is to save:

  • All your receipts (including for your expenses)
  • Your relevant bank statements
  • Any VAT payment receipts (if registered)
  • Anything related to PAYE payments (if you have any employees).

A limited company needs to record more information than a sole trader, specifically anything that relates to the company itself.

This means you need to keep details of:

  • All directors, shareholders and company secretaries
  • Shareholder votes and resolutions results
  • Debentures: promises to repay loans at a specific date in the future
  • Indemnities: promises to make payments if something goes wrong and your company is at fault
  • Selling company shares to someone
  • Secured loans or mortgages
  • Anyone with 'significant control' (someone who has more than 25% of shares in the company, more than 25% of voting rights and the right to appoint or remove the majority of the board of directors).2

And, your accounting records must include:

  • All money received and spent
  • Details of assets
  • Debts owed or is owed
  • Stock the company owns at the end of the financial year (including stock-takings)
  • Goods bought and sold including everyone involved in the transactions

Unsurprisingly, most limited companies use the services of a qualified finance professional, usually an accountant to handle everything for them.

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Step 6 - organise your workspace

Having a home office or designated workspace has become increasingly common, as it allows for more flexibility and eliminates commuting time.

However, your business plan must consider the potential for distractions and the need for separation between work and home life. Some people may find it beneficial to rent an office space outside of the home to maintain this distinction.

Ultimately, the best option for you will depend on your specific needs and preferences. Whatever you decide, make sure to create a dedicated space for work to maximize productivity.

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Step 7 - what insurance is needed for being self-employed?

This depends on the nature of your work, the assets you want to safeguard, and whether you have employees.

Below is an overview of different types of self-employed insurance:

Public liability insurance

Public liability insurance provides protection for businesses against claims made by the public for injury or damage caused by the business' activities.

The coverage applies to claims made by third parties, such as customers or clients, as well as members of the public who may be affected by the business' operations.

This type of insurance is designed to protect the business financially in case of legal action or compensation claims.

The coverage typically includes costs associated with legal defence, as well as compensation pay outs to third parties.

For example, if a customer slips and falls in a business's premises, the public liability insurance will cover the cost of any legal proceedings. It will also cover the cost of any compensation that may be awarded. It’s important to note that Public Liability insurance does not cover the loss or damage to the business's own property or goods.

Public liability insurance is typically required by businesses that have a high degree of contact with the public, such as retail shops, restaurants, and service providers. However, we’d still recommend this insurance even if your business does not have direct contact with the public. For example, if you’re at risk of causing damage to the third party's property.

Professional indemnity insurance

Professional indemnity insurance is also known as errors and omissions insurance. It protects you from financial loss resulting from claims of negligence, errors, or omissions in the course of their work.

It’s designed to protect professionals, such as lawyers, accountants, and consultants, who provide advice or services to clients. The coverage applies to any financial loss suffered by a client as a result of the professional's actions or failure to act.

This typically includes coverage for legal defence costs and compensation pay outs.

For example, if a client claims that a consultant provided inaccurate advice that resulted in financial loss, the professional indemnity insurance would cover the cost of any legal proceedings. It would also cover any compensation that may be awarded to the client.

Additionally, it’ is also important to note that professional indemnity insurance can cover any disciplinary proceedings and the cost of defending reputational damage.

Credit insurance

Credit insurance is also known as trade credit insurance or accounts receivable insurance. It helps businesses protect against the financial loss resulting from non-payment of debts by their customers.

The coverage applies to businesses that extend credit to their customers, such as retailers, wholesalers, and manufacturers.

The insurance can be used to protect against the risk of default on payments due to customer insolvency, prolonged default, or political risks.

It typically includes coverage for losses resulting from customer non-payment, including outstanding invoices, legal costs, and collection expenses. The policy can also include coverage for bad debt resulting from customers going bankrupt, defaulting on payments, or experiencing other financial difficulties.

Additionally, it can also cover the risk of non-payment due to political events such as war, expropriation, and revolution. The coverage may also include some level of risk assessment and management services to help the business make informed decisions on extending credit.

Equipment insurance

Equipment insurance, also known as machinery insurance or mechanical breakdown insurance, is a type of insurance that provides coverage for the repair or replacement of equipment or machinery used in a business.

Coverage applies to a wide range of equipment, including manufacturing machinery and office equipment.

The insurance can be used to protect against the risk of damage, breakdown, or loss of the equipment due to various reasons such as accident, fire, flood, theft, and other perils.

It typically includes coverage for the repair or replacement of the equipment, as well as any additional costs associated with the loss, such as rental equipment, transportation, and labour.

It can also include coverage for loss or damage caused by power surges, electrical or mechanical breakdown, and normal wear and tear.

Some policies may also offer additional coverage options such as liability coverage, loss of income, and accidental damage.

Buildings and contents insurance

Building and contents insurance provides coverage for physical damage to the building and contents of a business.

Coverage applies to both commercial and residential buildings.

The building coverage provides protection for the structure of the building, including the walls, roof, and foundations.

The contents coverage provides protection for the items inside the building, such as furniture, equipment, and inventory.

It can be used to protect against the risk of damage, loss, or destruction of the building and contents due to various reasons such as fire, storm, flood, theft, and other perils.

It includes the repair or replacement of the building and contents, as well as any additional costs associated with the loss, such as temporary accommodation, transportation, and labour.

It can also include coverage for loss or damage caused by power surges, electrical or mechanical breakdown, and normal wear and tear. Some policies may also offer additional coverage options such as liability coverage, loss of income, and accidental damage.

Key man insurance

Key person insurance provides financial protection to a business against losses that may occur as a result of the unexpected death or illness of an essential member of the company. This can include the owner or manager.

Key individuals that may be covered under this insurance include:

  • Directors
  • Primary sales people
  • Project managers
  • Anyone with valuable skills or knowledge to the company

Product liability insurance

If the goods you produce, sell, or repair cause injury or death to someone, or damage to property, you may be held liable for compensation.

Even if you haven't been negligent, you could still be held responsible for damages or injuries caused by defects in the design or manufacturing of your product.

Businesses in high-risk sectors, such as food and drink, toys, or electronics, should particularly consider this type of insurance.

It's worth noting that product liability insurance is frequently included with public liability insurance.

Legal expenses insurance

Legal expenses insurance is meant to cover expenses associated with defending legal proceedings, such as legal fees and court costs. It generally includes protection for disputes related to employment, property, and contracts.

Employers’ liability insurance cover

Employers are required by law to have employers' liability insurance in place to compensate employees who are injured while carrying out their work duties.

Goods in transit insurance

If your business involves the transportation of goods or stock across the country, it's important to consider insuring them against the risk of loss or damage while in transit.

Haulage insurance typically covers transportation by road or rail and may also extend to cover inland or coastal waterways. However, it's important to note that international transit by sea or air requires separate insurance coverage.

Business interruption or business continuity insurance

Business interruption insurance will cover you for the costs incurred and loss of profits if you’re hit by a disaster like a flood or fire.

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  1. Insurance Market Dynamics & Opportunities report 2021; GlobalData
  2. People with significant control; UK Government website

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