Starting a new business in the UK – Self Employment

This is the second post in a series on running your own business. It covers the advantages and disadvantages of running a business as a self-employed person.

Please, also see my previous post on setting up a business and a limited company

For a small, lifestyle business doing things like selling arts and crafts, up-cycling a few pieces of furniture, or buying and selling collectables then you might consider being self-employed to be the best option.

Advantages of self-employment

Self-employment is easy to start

All you need is an idea. You can start off trading by whatever means you want. A stall, a website, Etsy, eBay, Amazon, party plan, whatever. You can start right now. If you are going to earn over £1000 profit then you need to register with HMRC as a self-employed person. You’ll then be issued with a Unique Taxpayer Reference and have to complete a self-assessment every year.

Register as self-employed with HMRC

You’ll also have to pay Class 2 and Class 4 National Insurance contributions.

Other than that, you’re good to go.

Getting a name is simple

Decide on your business name, for instance ‘Berkshire Gilded Horseshoes’ then your business name is Your Name trading as Berkshire Gilded Horseshoes. That’ll be on your business bank account, your letterhead, tax information and anything official. Things like shop signs or point of sale can just say Berkshire Gilded Horseshoes.

Of course, there are some rules that need to be followed when choosing a business name.

  • You cannot use anything offensive (there seems to be no definition of offensive so this might be down to whether someone complains)
  • You cannot use an existing trademark
  • Don’t use ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’
  • Avoid any ‘sensitive’ words or implying an association with local or national government without permission

You can read all the business and company naming rules here

Self-employed banking is simple

Ideally, you would set up a separate business account in the name of Your Name trading as Berkshire Gilded Horseshoes quickly.

You could also use your own current account as money in the business is the same as your money. However, using your own account is not advisable. It’s best to have a separate account so you can track your business income and expenses separately to your day-to-day personal expenses.

There are many start-up challenger banks that run via an app where you can have an account set up and ready to go in a few hours. Avoid the big banks and their fees and inefficiency.

Low administration overhead

As a self-employed person, you have very little administrative burden. The only piece of paperwork you’ll have to complete each year is your HMRC Self Assessment.

You may have to register with other government entities like The Information Commissioner’s Office if you plan to keep records containing the personal information of any customers, staff or suppliers.

Costs of setting up a business

Starting a business as a self-employed person is essentially free. All you do is notify HMRC and open a business bank account. Simple.

Withdrawing money from a business

You can dip into your business’ account and take money from it at any time. These withdrawals are called ‘drawings’. You pay tax on this money via your self-assessment. Taking money doesn’t reduce the profits of the business so you will pay tax on the total annual profits regardless of what money you take out.

You can also register as an employer and pay yourself via PAYE. In this case, the wages or salary you pay yourself and any tax and National Insurance you pay to HMRC are counted against the business profits.

Disadvantages of self-employment.

You and your business are the same thing.

Unlike a company, your business is simply an extension of your own money and your tax and national insurance are calculated from any job you have, any interest you earn in any bank accounts in your name and your self-employment income. There may be other sources of income that HMRC will count towards your income.


You will pay income tax and national insurance on all the income you earn. This income can be from self-employment, your regular day job, bank interest and anything else HMRC decide is to be counted as income.

This can be a problem if, for instance, you have a job earning £50,000 for Big Corp PLC. This £50,000 will use your personal tax-free allowance of £12,500 plus eat up all of the basic rate income tax band of £37,500.

This means any profit you earn from your self-employment will be taxed at 40% that’s a lot of tax to pay and you need to reflect if the work you do is worth this sacrifice. If you think not then a limited company may be the way to go.

See the income tax bands for 2019-20 here.

Information correct as of 26th August 2019.

You are 100% liable for any money your business owes

Unlike a limited company, your self-employment business’ debts are your debts. If your business owes money then creditors such as HMRC, suppliers, customers or staff, anyone your business owes, can come after you personally. This means your personal assets could be at risk – you could lose your car, your TV, or even your house.

Again, if you want to guard against this possibility then form a limited company.

Professional needs

When you start dealing with customers and suppliers you may find that some or many of them will only deal with a limited company. They will refuse to deal with a sole-trader.

If you are selling crafts to friend and family this is not likely to be a problem. However, if your customers and suppliers are larger organisations they may well frown on dealing with a self-employed person running a business.

Only you know your marketplace and you should consider this when you make a decision on forming a company or running a business.

Your business’ name is not protected

Your business name has no protection other than under trademark law and that’s expensive to defend. If another gilder of horseshoes wants to set up a business called Their Name trading as Berkshire Horseshoe Gilders there’s nothing to stop them.

If they refuse to drop the name then your only recourse is through the courts.

Money and funding

As I have already mentioned, the money in your business is your money. It might just reside in a different bank account.

This makes it harder to attract funding, loans, investment as there’s no protection for the cash. Someone may decide to invest in your business send you some new money and then you run off on a holiday to Bermuda using the investment to pay for it. So investors, banks, business angels will be very wary of helping you to finance your business.

No shares

You cannot issue shares for a business. Is this a problem?

It’s not a problem if you only plan on running a business for your own benefit. When you stop or, heaven forbid, die then the business goes away.

If you want your business to survive your demise or you want to give all or part of it to someone else then you need to be a company and not a business. A company can issue shares, a business cannot.

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