Latest figures show that unemployment in the UK has now reached a 17-year high, with the number of people out of work rising by 114,000 to 2.57 million in the three months to August.
With many predicting that jobless numbers could rise further, it’s little wonder that the number of self-employed people in the UK has now topped four million.
However, while being your own boss gives you the flexibility to work when and where you want, there are drawbacks you need to consider before becoming self-employed.
These include not having a regular set income, as well as not having paid holidays or access to a company pension scheme into which an employer makes contributions.
That said, working for yourself can be extremely rewarding, although there are plenty of things you need to know before going it alone. Here, we offer our top tips to those planning on setting up their own businesses…
Work out how you are going to structure your business
There are three main ways you can set up your business. Firstly, you can be a sole trader, which means your business is owned and run by you alone.
As well as income tax, which you pay through the self-assessment system, as a sole trader you will have to pay two types of national insurance. Class 2 contributions are a fixed weekly amount of £2.50 this tax year, but if your earnings are below £5,315 this tax year you might not need to pay these.
You may also have to pay Class 4 contributions, which are a percentage of your taxable profits, equivalent to 9% of annual profits between £7,225 and £42,475 this tax year, and then 2% on profits over that amount.
If more than one of you is going into business, you can set up as a partnership. This is similar to a sole trader except that two or more people run the business.
The third option is to set up as a limited company. This means your personal assets will be protected if the business runs into financial difficulties. You will have to file accounts and annual returns at Companies House and pay corporation tax every year.
The 'small profits' tax rate is currently 20% for profits up to £300,000 per year.
Unlike the sole trader route, a limited company can hang onto profits and distribute them as dividends in future tax years if necessary. That means during a good year, the directors can delay paying income tax on dividends, and defer paying dividends to the following tax year.
Whichever route you take, you have to register with HM Revenue & Customs within three months of becoming self-employed, or you could be fined. You can do this by calling the helpline for the Newly Self-Employed on 08459 154515.
You can find more information about income tax for self-employed people from the HMRC website .
Funding your business
Many people use their own savings to get their businesses off the ground, as it has become much harder to get funding from banks.
Alternatively, there may be grants available to help you set up your business, or you might be able to enlist the help of a business angel.
This is someone who is prepared to invest their money in a new business in the hope that they will eventually profit from it.
The Business Link network and its advisers can advise you about the financial support available in your area. You can contact the Business Link Helpline on 0845 600 9 006.
Set up a business bank account
If you are setting up as a limited company then you will have to have a business bank account.
You will need to show your business plan before opening an account and you should compare business current accounts to find the best deals on credit balance interest rates and account transaction fees.
If you are a sole trader you aren’t legally required to have a business account, but often this is the best way to keep your business and personal finances separate.
Registering for VAT
If your business’ turnover for the previous 12 months is more than £73,000, the current registration threshold, or you expect it to go over that figure in the next 30 days alone, you must register for Value Added Tax (VAT).
Once you have registered, you will need to submit VAT returns online every three months and pay any VAT you owe at the same time.
According to HMRC, there are potential cashflow advantages of being able to charge VAT on your sales and claim back VAT on your purchases.
For example, if you sell zero-rated items and buy standard-rated items you would receive a VAT refund from HMRC.
Similarly, if you have not yet sold anything or don't sell anything during a VAT accounting period, you may still be able to claim VAT back on your purchases.
Keep proper records
You will need to keep accurate and detailed records of your business. You may be able to keep your own books or employ a bookkeeper or accountant, but if you are trading as a limited company you will need the help of an accountant.
This is especially important if you employ other people, as you will be responsible for paying wages, tax, national insurance contributions and Working Tax Credit where relevant.
You will also have to meet the requirements of employment law and health and safety regulations.
Whether you work from home or from business premises, you will still need insurance to protect any equipment that you need to run your business.
Your home insurance is only designed to cover your personal effects and anything that you have that is for domestic use, and failing to tell your insurer that you are running a business from home could leave you uninsured altogether.
If you employ at least one member of staff you are also required by law to take out employer’s liability insurance, and you will also need public liability cover if you have clients or customers entering your home for business reasons, or if you have business premises.
As with any kind of insurance, it is vital to shop around to find competitive premiums. You can search a wide range of policies here. Energy
All six of the big energy suppliers have now announced price hikes, meaning higher bills for millions of households and businesses unless they take action.
All types of business users can reduce their electricity and gas prices by comparing tariffs offered by all the major energy companies.
This applies whether you operate a UK micro business from home, a small business or larger businesses and have commercial premises.
Remember that with business tariffs, if you don't make a note of when your tariff is up for renewal, your contract will roll over automatically and you may find your rates have been increased and you'll have to wait another year before you can change it.
You can compare a wide range of business tariffs and switch online here:
Please note: Any rates or deals mentioned in this article were available at the time of writing.