The 6-step process
Step 1 - Choose your structure
Sole Trader - Simplest to set up + run - You and the business are legally the same person - All profits are personally taxed - Personal liability for business debts - Best for: low-risk freelancing, < £40k profit, testing a business idea
Limited Company - Separate legal entity - Pays Corporation Tax (19-25%); you extract profits via salary + dividends - Personal liability protection - More admin (Companies House filings, statutory accounts) - Best for: > £40k profit, contractor work, liability-sensitive sectors
Step 2 - Register
As sole trader: - Free - Register at gov.uk/register-for-self-assessment - HMRC sends UTR within 10 working days - File Self Assessment annually
As limited company: - £12 to register with Companies House - Takes 24 hours (online) or 8-10 days (paper) - Need registered office, director(s), shareholder(s), and Standard Industrial Classification (SIC) code - Also register for Corporation Tax (separate from Companies House) - Set up payroll if drawing salary (PAYE)
Many UK contractors use a company formation service (~£50-150) for limited company setup.
Step 3 - Open a business bank account
Not legally required for sole traders but strongly recommended.
Required for limited companies.
Common UK options in 2026: - Tide / Starling Business (free / cheap, app-based) - Monzo Business - Mettle (NatWest, free for sole traders) - Traditional banks (Barclays / HSBC / NatWest)
Step 4 - Set up accounting
Sole trader options: - Spreadsheet + receipts file (free, manual) - Cash-basis bookkeeping software (~£10-25/mo) - FreeAgent / Xero / QuickBooks (~£15-30/mo)
Limited company options: - Accounting software essentially required - Plus an accountant (~£80-200/mo for limited company)
Step 5 - Plan for tax + NI
Sole trader: - Income Tax - same bands as employees - Class 2 NI - minor, £3.45/week if profits exceed £6,725 - Class 4 NI - 6% on profits £12,570-£50,270, 2% above - Self Assessment payments: 31 January and 31 July
Set aside 25-30% of every invoice into a tax savings account.
Limited company: - Corporation Tax - 19% under £50k profit, sliding to 25% at £250k - Personal tax on extraction: - Salary (PAYE) - taxed as employment income - Dividends - taxed at 8.75% (basic) / 33.75% (higher) / 39.35% (additional) - VAT registration mandatory above £90,000 turnover
Step 6 - Check IR35 (contractors only)
If contracting through your limited company: - IR35 determines whether HMRC treats your engagement as employee-like (inside) or genuinely self-employed (outside) - Inside IR35: same tax as PAYE - Outside IR35: full benefits of limited company structure - Since April 2021, medium/large clients determine IR35 status (not you) - HMRC's CEST tool provides indicative status checks
The first 90 days
Day 1-7: - Choose structure - Register with HMRC (sole trader) or form company (Companies House) - Open business bank account
Day 8-30: - Set up accounting software - File initial paperwork (PAYE if limited co + drawing salary) - Create first invoice template - Set tax-savings aside (25-30% of every invoice)
Day 31-90: - First invoices issued + paid - Tax-savings building - Consider accountant relationship if not already engaged
Common mistakes new self-employed make
- No separation between business + personal finances - guarantees Self Assessment pain
- Not setting aside tax - January tax bill becomes a crisis
- Going limited too early - admin overhead exceeds tax benefit under £40-50k profit
- Ignoring IR35 - contracting inside IR35 via limited company is the worst-of-both-worlds
- Skipping accountant for limited company - false economy
In short
UK self-employment setup in 6 steps: choose structure - register with HMRC - open business bank account - set up accounting - plan tax + NI - check IR35. Sole trader for simplicity + lower earnings; limited company for higher earnings + contractor positioning. 1-2 weeks to operational.