Small steps and giant leaps: transitioning to self employment

Sometimes in life, change is considered, planned and expected; at other times it takes you by surprise as your personal circumstances shift. The latter happened to me this year as I moved to full time self employment.

I was fortunate, having balanced my main job at Edinburgh Napier University with freelance work as Awdesign for 12 years. My roles in each were largely similar, involving a broad range of digital work like web design and web analytics. This allowed me to utilise skills developed as a freelancer at the University and vice versa.

However, despite working as a freelancer for some 16 years now, I still had gaps in my knowledge on the business side of things that I had to rapidly plug when I left Edinburgh Napier. Below are some of my key learnings over the past few months and resources that I have found useful.

Running a business

Taxation

The main priority for a business should be to stay on the right side of Her Majesty’s Revenue & Customs (HMRC for short). I took care of this in 2003 when I registered for self assessment, having moved from full time employment to a short-term voluntary role with WEC International. I did this to keep up National Insurance contributions and also to enable me to start freelancing.

Each year since then I have completed an online tax return covering income from both my main and freelance incomes. Up till now I’ve been able to cover short falls in tax through an amended PAYE code at Edinburgh Napier.

To account for this change I now set aside 30% of any sales income to cover my tax bill. As a self employed person I’ll be liable for two payments each year: one in January and one in July.

Legal structure

More recently I have also been considering what legal structure is best for my business. There are a number of options available to choose from:

  1. Sole Trader: this is the most straightforward and involves no complicated legal processes other than registering for self assessment and keeping good financial records of income and expenditure. Profits are subject to tax and National Insurance, and any money coming into the business is yours to do with what you will.
  2. Partnership: this involves two or more sole traders signing a formal partnership agreement to set up a business together.
  3. Limited Company: this involves registering a business as a separate legal entity with Companies House and appointing a director (usually yourself) and other shareholders if required. The company pays Corporation Tax and you are an employee of your own business. Money coming in belongs to the business and you pay yourself a salary, including PAYE and National Insurance contributions. Directors are able to withdraw money from the business in the form of dividends.
  4. Social Enterprise: this is a company that is not for profit, like a charity. Any profits are channeled back into the business.

I am currently a Sole Trader with the intention of switching to a Limited Company when it makes professional and financial sense to do so. This process involves a nominal administration fee of around £12 and the submission of two documents:

  1. Memorandum of Association: a document signed by all company shareholders declaring the formation of a company
  2. Articles of Association: a document outlining all the legal statutes of the company (a generic template is available on the HMRC website)

Value Added Tax (VAT)

Another consideration for small companies is whether or not to become VAT registered. If your turnover is likely to approach £85k in a rolling 12 month period then this is a legal requirement rather than a choice. However, if conducting a lot of business to business (B2B) work, this may be a worthwhile leap as, despite having to add an additional 20% to your costs, other VAT registered companies can reclaim some of their own VAT by utilising your services, ultimately making you a cheaper option than those who are Sole Traders.

Accounting

Since setting up Awdesign in 2003 I have kept a spreadsheet of all income and expenditure, originally in Microsoft Excel and more recently on Google Sheets. Invoices have been produced in Excel and exported as PDF documents.

Given the legal requirement for all companies to make tax digital in 2019, and self employed people to follow suit in 2020, I decided to switch to cloud based accounting software now. My tool of choice is Xero. It was recommended to me by two close friends, one the director of a charity and the other a chartered accountant.

Those who have read my previous posts will know that I’m a sucker for anything cloud based. Xero is no different and it makes the process of invoicing a breeze. It also allows clients to pay straight from the invoice itself.

Xero offers a month’s free trial and routinely offer discounts when opening accounts so watch out for those!

Resources for the self employed

As mentioned above, there is a lot to consider when starting up or expanding your own business. Thankfully, there are a number of resources available for those making the leap.

Business Gateway

Business Gateway offers free (yes, free!) impartial advice to those starting out. They run a wide array of workshops covering everything from marketing to finance, bookkeeping to planning. They assign a Business Adviser to clients who assist them in developing a Business Plan and offer advice on all aspects of running a company.

Workshops and events are a great place to network with others at the start of their own journeys. They are also reassuring as you can benefit from the experience of those who have been there and done that, and you can bounce ideas around in a relaxed, non-threatening environment.

Online resources

The HMRC understand that taxation isn’t simple. As such, they offer a wide range of videos for those starting out as self employed. These videos cover topics like allowable business expenses and completing self assessment and VAT returns. The videos are available on the HMRC YouTube channel, and written guides are available on the main HMRC website.

Networking

I mentioned above the benefit of Business Gateway events in terms of networking. I have also found it beneficial to catch up with other freelancers. It’s been helpful to discuss the way they work with clients, how they track work and keep records. For those who are based in their own home, it’s been useful to see how they successfully balance work and personal life as the lines are much more blurred.

Summary

Going it alone can seem daunting. Indeed, having the safety net of a full time job was something I valued. However, on reflection, having my job at Edinburgh Napier also stunted the growth of my own business due to the limited hours available to devote to it.

I admit that I am fortunate to have landed on my feet. I had an existing business that has been trading for well over a decade with a reasonably solid client base. I’ve also been able to build up a range of skills over the years that naturally lend themselves to promoting my business, including web design and social media marketing.

Moving to self employment has been a steep learning curve and, while unexpected, has been hugely beneficial to me both professionally and personally. There will, of course, be challenges ahead, but I’m excited to see what opportunities are coming.

Is self employment for you?

If you’re considering the leap to self employment, I’d certainly recommend contacting the Business Gateway at the outset. If you know others who are self employed, meet up with them to get a realistic view of the pros and cons and a gauge of all the things you need to consider. If you’d like to ask me anything, feel free to get in touch by phone, email or on social media:

07740 338668
hello@jamesganderson.co.uk
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