Going Self-Employed

The 1,000 question

If you're earning money on the side -- selling clothes on Unbought, mowing lawns at weekends, freelancing in the evenings -- there's one number that decides whether HMRC needs to know about it: 1,000.

This is the Trading Allowance. If your total self-employed income (not profit -- income) is under 1,000 in a tax year, you don't need to tell HMRC, register, or file anything. It's completely tax-free.

The moment you cross 1,000, even by a pound, you need to:

1. Register as self-employed with HMRC
2. File a Self Assessment tax return
3. Pay any tax owed

This doesn't mean you'll owe tax on the full amount. You'll only pay tax on your profit (income minus allowable expenses). But you must register and file.

Jargon Buster: Trading Allowance A 1,000 tax-free allowance for self-employed or miscellaneous income. If your income is below this, you don't need to report it. If it's above, you can either deduct the 1,000 as a flat allowance (instead of claiming actual expenses) or claim your real expenses -- whichever gives a better result.

Do I need to register?

The key distinction: income, not profit. If you sold 1,200 worth of clothes but spent 500 buying them, your profit is only 700 -- but your income was 1,200, which is above the Trading Allowance. You need to register.

There's one exception: selling personal possessions isn't trading. If you're clearing out your wardrobe and selling old clothes you bought for yourself, that's not self-employment. But if you're buying items to resell at a profit, or making items to sell, that's trading.

How to register

Registering as self-employed takes about 10 minutes online:

1. Go to gov.uk/register-for-self-assessment
2. Sign in with your Government Gateway account (or create one)
3. Complete the form -- your name, address, National Insurance number, the date you started trading, and what your business does
4. Receive your UTR -- HMRC will post you a Unique Taxpayer Reference (10-digit number) within 10 working days. You'll need this for everything Self Assessment-related.

Deadline: You must register by 5 October following the tax year you started trading. If you started earning above 1,000 in the 2025/26 tax year (starting 6 April 2025), you must register by 5 October 2026.

Late registration doesn't trigger a penalty on its own, but filing your tax return late does. And you can't file until you've registered. So register early.

Jargon Buster: UTR (Unique Taxpayer Reference) A 10-digit number HMRC gives you when you register for Self Assessment. You'll use it to file your tax return, log into HMRC online services, and sometimes when dealing with clients or accountants. Keep it safe -- it doesn't change.

Sole trader vs partnership vs limited company

When you register as self-employed, you're becoming a sole trader. This is the simplest business structure -- you and the business are legally the same thing. But it's not the only option.

Structure	What it is	Liability	Tax	Best for
Sole trader	You are the business. No legal separation.	Unlimited -- you're personally liable for all business debts	Income Tax + NI on profits	Starting out, low risk, simple
Partnership	Two or more people share profits. Each partner files their own SA return.	Unlimited (each partner)	Each partner pays Income Tax + NI on their share	Friends or couples running a business together
Limited company	A separate legal entity. You're a director and shareholder.	Limited to what the company owns	Corporation Tax on profits + Income Tax on salary/dividends you take	Higher profits (typically 40k+), wanting liability protection

For most people starting out, sole trader is the right answer. It's free to set up, there's minimal paperwork, and you can always switch to a limited company later if the numbers justify it. Chapter 12 covers when and why to make that switch.

National Insurance when self-employed

As an employee, NI is simple -- it comes off your payslip. As a self-employed person, you pay two types:

Class 2 NI -- A flat rate of 3.45 per week (179.40 per year). This counts towards your State Pension qualifying years. You don't pay this if your profits are below 6,725 per year, but you can choose to pay voluntarily to protect your pension record.

Class 4 NI -- Calculated on your profits:

• 6% on profits between 12,570 and 50,270
• 2% on profits above 50,270

Class 4 is collected through your Self Assessment return, along with your income tax. You don't pay it monthly -- it comes as part of your January tax bill.

Key point: If you're employed AND self-employed (like Sam), you pay employee NI through PAYE on your salary, and Class 2 + Class 4 NI on your self-employed profits through Self Assessment. The two systems run side by side.

Your business name

As a sole trader, you can trade under your own name or choose a business name. There's no registration required for a business name (unlike limited companies, which register with Companies House).

Rules for business names:

• You can't use "Limited", "Ltd", "LLP", or "plc" -- these imply a company structure you don't have
• You can't use a name that's offensive or suggests a connection to government
• Some words need permission (e.g., "Royal", "National", "Authority")
• You must put your own name and address on all paperwork, invoices, and your website

Sam trades as "Sam's Vintage" on Unbought. Steve doesn't bother with a business name -- he just uses his own name. Both are fine.

Employed and self-employed at the same time

This is Sam's situation, and it's increasingly common. You can absolutely be employed and self-employed at the same time. Here's what happens:

• Your employment income continues to be taxed through PAYE (your employer handles this)
• Your self-employed income is declared through Self Assessment
• HMRC adds both together to calculate your total tax liability
• Any tax already paid through PAYE is deducted from the total
• You pay the difference through Self Assessment

The important thing to understand: your self-employed income sits on top of your employment income. If your salary already uses up your Personal Allowance and Basic Rate band, your self-employed profits might be taxed at the Higher Rate (40%) from the first pound.

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Real Scenario: Sam registers

Sam's Unbought clothing sales have been growing. Over the 2025/26 tax year, Sam's sales reached 4,800. After deducting the cost of stock (2,100), packaging (180), and Unbought fees (340), Sam's profit is 2,180.

Does Sam need to register? Yes. Income (4,800) is above the 1,000 Trading Allowance.

When? By 5 October 2026 (for the 2025/26 tax year). Sam registers in July 2026 and receives a UTR two weeks later.

Sam's tax position:

• Employment salary: 35,000 (Personal Allowance and most of the Basic Rate band used)
• Self-employed profit: 2,180 (taxed at 20% because Sam is still in the Basic Rate band)
• Tax on self-employed income: 2,180 x 20% = 436
• Class 4 NI on self-employed income: 2,180 x 6% = 130.80
• Class 2 NI: 179.40
• Total extra tax from side hustle: 746.20

Sam earned 2,180 profit and owes 746.20 in tax and NI. Net gain: 1,433.80.

Real Scenario: Steve goes full-time

Steve has been doing weekend gardening jobs while employed at the landscaping company. His side income reached 8,500 in the tax year, with 1,200 in expenses (fuel, tools, dump fees). Profit: 7,300.

Steve registered with HMRC in September. But Steve is also thinking about quitting his employed job to do gardening full-time. Here's the maths:

Currently (employed + self-employed):

• Employment: 28,000 (takes home 22,284 after tax/NI/pension)
• Self-employed profit: 7,300
• Combined income: 35,300

If full-time self-employed at current rate:

• Projected annual income: ~36,000 (estimating growth from going full-time)
• Projected expenses: ~6,000 (van fuel, tools, insurance, dump fees)
• Projected profit: ~30,000
• Tax on 30,000: (30,000 - 12,570) x 20% = 3,486
• Class 4 NI: (30,000 - 12,570) x 6% = 1,045.80
• Class 2 NI: 179.40
• Take-home: ~25,289

Steve's take-home would be about 3,000 more than employment alone, plus no employer pension contribution (Steve would need to arrange his own). The freedom is appealing, but Steve needs an emergency fund first -- there's no employer sick pay or holiday pay when you're self-employed.

Key point: Before going full-time self-employed, build at least 3 months of essential expenses in savings. There's no safety net -- no sick pay, no holiday pay, no employer pension. Chapter 4's emergency fund becomes critical.

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Checklist: Setting up as a sole trader

• Confirm your self-employed income is above 1,000 (Trading Allowance threshold)
• Register with HMRC at gov.uk/register-for-self-assessment (by 5 October deadline)
• Set up a Government Gateway account if you don't have one
• Receive and store your UTR (Unique Taxpayer Reference)
• Open a separate bank account for business income and expenses (not required by law, but makes everything vastly easier)
• Start keeping records of all income and expenses from day one (Chapter 7)
• Set aside approximately 30% of profits for tax and NI
• Check if you need any insurance (public liability for Steve, product liability for Sam)

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Jargon Buster

Term	Plain English
Sole trader	The simplest business structure -- you and the business are legally the same entity
Trading Allowance	1,000 of self-employed income that's tax-free without needing to report it
UTR	Unique Taxpayer Reference -- a 10-digit number HMRC gives you when you register for Self Assessment
Class 2 NI	A flat-rate weekly National Insurance payment for self-employed people (3.45/week)
Class 4 NI	A percentage-based National Insurance payment on self-employed profits (6% on 12,570--50,270)
Self Assessment	The process of reporting your income to HMRC and calculating your own tax (covered in detail in Chapter 8)
Government Gateway	The login system for HMRC's online services
Public liability insurance	Insurance that covers you if a member of the public is injured or their property is damaged because of your work