Sole trader or self-employed status might be the best option if you are starting out just on a part time basis, as it is easy to set up and involves less administration. You can call HMR&C or register as self-employed online. It’s quick and easy to do. You will need to keep records of your income and expenditure and complete an annual self-assessment tax return. An accountant can do either or both of these for you at little cost.

You pay income tax on your profits, as you would on your income if you were employed but you pay Class 2 or Class 4 National Insurance Contributions. Class 2 is £2.80 per week and Class 4 is 9% on profits between £8,060 and £42,385 and 2% on profits above £42,385

A disadvantage with self-employed status is that if your business runs in to difficulty, you are personally responsible for its debts. You can always change to a Limited Company if your circumstances change at a later date.

Sounds good, so why would I choose a Limited Company status?

With a Limited Company, you are not personally responsible for the company’s debts if the business fails and the risk is limited to what you invested in the company.

Depending on what kind of business you are running, a Limited Company status is likely to present a better image to potential customers.

You only need a minimum of 1 Director and Shareholder to set it up but the process is a little more lengthy. You can do this online on the Companies House website: it costs £15 and takes around 20 minutes.

There is more administration involved, however. You need to complete and pay for an annual return, file your accounts annually and pay Corporation Tax on profits. An accountant can do all this for you but it will cost you more than a self-assessment tax return.

As an employee of the Limited company you will have to pay Income Tax and National Insurance Contributions but you can distribute profits to Shareholders as dividends.

I hope this has given you some ideas as to which way to go. If you would like to talk about any of this or any other accounting issues or requirements, then please contact me on any of these ways:

e-mail: nic@taofinancial.com

mobile: 07985 645087

twitter: @taofinancial