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How to get set up as a self-employed contractor in the UK

Congratulations on taking the first step to become an independent contractor! You are great at what you do and have decided to branch out and start your own business. The first step is doing lots of research to ensure that your business takes off running. In this article, I will describe the steps involved in setting yourself up as a self-employed contractor in the UK.

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This is a new chapter in your life, a milestone that you will look back on later in life. Although this is exciting, you will need to understand that this may be a challenge which requires a brand new set of business skills that you have never considered before. Here are some tips to help you get started.

Decide your business structure and register your business

Your business structure refers to how your business is legally classified and organised. You will need to report this to HMRC before you start conducting your business unless you are under the threshold as a sole trader. This will also determine how much tax you will pay, as well as your liability as a business owner.

As a contractor, you will most likely register as a sole trader, however, there are 3 main business structures to choose from.

Sole Trader

A sole trader business structure is where one person owns and runs the entire business. Although you can have other employees under this business structure, it is usually used for a single person operation.

If you make more than £1000 in the tax year from self-employment, you are required to register your business with HMRC as a sole trader. You can register even if you do not reach the threshold to help you prove that you are self-employed, or to make voluntary tax payments to qualify for benefits.

To register as a sole trader, you can do so through the HMRC website by submitting a Self Assessment tax return. When you complete your tax return, it is important that you keep records of your business sales, business expenses, personal income, and VAT reports (if registered). You should keep these records for at least 22 months after the end of the tax year.

As a sole trader, you will also need to pay income tax and national insurance. You will also have to register for VAT if your business has a taxable turnover of over £85,000, but you can voluntarily register if you are below the threshold.

If you register as a sole trader, you are personally liable for your business finances. This is known as unlimited liability. This means that there is no distinction between your personal and business finances, so you can keep any business profit, but will also have to repay any business debts.


A partnership is a type of business structure where two or more individuals share ownership of the company.

There are 3 different types of partnerships in the UK, each of which has different rules that apply to the business owners. The 3 types of partnerships are general partnerships, limited partnerships (LP), and limited liability partnerships (LLPs).

With general partnerships, all of the owners share responsibility for the finances, business management, and financial records. They are equally responsible and liable. This is the most common form of partnership. All partners agree to unlimited liability and are responsible for any business debts.

To register as a general partnership, you will need to choose one ‘nominated partner’ who will register for Self Assessment through HMRC.

With limited partnerships, there is at least one ‘limited partner’ and one ‘general partner’. The limited partner provides financial contributions to the business as an investor, while the general partner manages the business, and can make decisions on behalf of the partnership. The general partner agrees to unlimited liability, whereas the limited partner has limited liability. The limited partner is only liable up to the amount of their investment.

To register as a limited partnership (LP), you must send an application form (form LP5) to the Companies House in your country. The application must be signed by all partners, and include a £20 application fee. It takes roughly 5 working days for the application to be processed.

With limited liability partnerships (LLP), one of the owners is considered a ‘designated member’ who has more responsibilities than the other partners and is responsible for financial records, registering for VAT, and filing returns. In this business structure, all partners have limited liability.

To register as a limited liability partnership, you will need to register with Companies House either by post, using software, or using an agent. Once processed, you will receive a certificate of incorporation.

When you start a partnership, you should create a ‘partnership agreement’, which outlines each partner’s responsibilities, liabilities, and rules as a partner. If you do not write a formal agreement, the Partnership Act 1890 will apply.

Limited Company

A limited company is a type of business structure where the company is a legally distinct entity. There are two types of limited companies, a private limited company, and a public limited company.

A private limited company does not offer shares to the public. This is the most common form of a limited company.

A public limited company offers shares to the public, which can be traded on the stock exchange. Public limited companies must issue at lease £50,000 in shares before they can be traded. This business structure is usually used for large businesses.

Unlike a partnership or sole trader business, in limited companies, business finances are completely separate from personal finances, and all shareholders have limited liability. This is the main advantage of this business structure, as shareholders are only liable up to the amount they initially invested.

To register as a limited company, you will need to register with the Companies House as a corporation. You can register online with HMRC with a few details, or send an application by post. It costs £12 to register, takes 24 hours, and you will be registered for corporation tax at the same time.

Get business insurance!

Business insurance is important to cover costs associated with liability claims and property damage. The type of insurance you should get depends on your business structure.

If you are a contractor, the terms of your contract will determine if you are required to be covered. Many large businesses require contractors to be insured for professional indemnity and public liability.

Professional indemnity insurance is required if you handle or process people’s property or data and if you provide advice or a professional service to customers. This will cover you if your work causes a customer to suffer a loss, either financial or reputational.

Public liability insurance is needed if you come into contact with customers, or work on their site. This type of insurance will cover costs related to a member of the public making a claim against your business.

If you work primarily at home and have home insurance, it is important to note that most home insurance policies do not cover business activities and property. It is recommended to consult an insurance broker to determine what type of insurance you require for your business.

Open a business bank account

Opening a business bank account will make it easier for you to keep track of your business finances. If you are a sole trader, it is not required to separate your business and personal finances, although it is highly recommended.

To open a business account, you will need an ID as well as a proof of address. Certain accounts may require more information such as your investments, estimated earnings, and tax status. All banks offer different features, types of accounts, and fees, so it would be beneficial to shop around and find the option that best suits your business.

Keep on top of your taxes

Even as a sole trader, you will need to pay taxes. When you worked for an employer, they automatically deducted taxes from your pay. Now, you will have to do this yourself based on your business structure and how much you earn.

You will need to register for Self Assessment, and submit a tax return to HMRC. To do this, you will need your National Insurance Number, and documents related to your pay, tax, benefits, investments, and your business sales and expenses.

Once you are registered, you will be issued a Unique Taxpayer Reference (UTR), to use for future tax returns. You can find more information regarding how to register, and the deadlines on the UK Government website.

Be realistic and honest with yourself

Being your own boss changes a lot of things. While you have more freedom in how you conduct your business, you also have a lot more responsibilities. Before you take the plunge, you should ask yourself the following questions to ensure that you are ready to become self-employed.

  • Are you ready to be your own boss and put in the hours and effort?
  • Can you manage with fluctuations in income?
  • Do you know how you will get customers?
  • Are you comfortable with managing cash flow, completing tax returns, and keeping detailed records?
  • Do you have an office or space to work and all of the equipment you require?
  • Do you have any major life events coming up in the future that may affect your income?
  • Have you considered the effects of losing employee benefits such as pension contributions, holiday pay, and sick pay?

These questions will help you determine whether you have considered all of the possibilities, and are ready for this challenge. It would also be beneficial to confide in another self-employed contractor to be your mentor and help you with any questions you may have along the way.

Keep track of your business finances with invoicing and accounting software

One of the most important aspects of your business is keeping track of your finances and important accounting documents. You can do this yourself, however, it can be a daunting task if you have no accounting experience. This is where invoicing software comes in.

With invoicing software, you can create and send customised invoices, quotes, delivery notes, and credit notes, as well as record expenses, and accounting reports such as the profit & loss statement, and the balance sheet.

Everything is updated and saved in real-time so you don’t have to deal with pesky paperwork. With Debitoor invoicing software, you can also invite your accountant, connect your bank account for automatic matching, and accept in-person and remote payments through our partners.

We try to make our software super easy to use, even if you have no previous accounting experience. You can create an invoice in under a minute with our 7-day free trial.

Written by
on 19/05/2020
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