Increasing numbers of people are giving up the daily grind of nine-to-five employment to go it alone and run their own businesses.

More than three million people, or 12 per cent of the UK population, have already set up on their own. Research by Vodafone UK indicates that a further 6 per cent of UK adults are in the process of setting up their own business and nearly a third of all people are considering doing so.

A survey by Yorkshire Bank found that almost three in five sole traders and small-business owners first decided to become self-employed because of a desire for more flexible working and an improved work-life balance. Two in five did so for greater financial control.

But before chasing these goals, you must first acquaint yourself with all the financial implications of going it alone. Professional independent advice at the outset is essential. Martin Bamford, of Informed Choice, the independent financial adviser (IFA), says: “Your IFA can perform a financial health check to ensure that you have considered all the most important areas. You should also work closely with an accountant to find out the implications of setting up your accounts.

“Finally, a solicitor will help you to draw up contracts and agreements. In a perfect world all three professionals should be talking to each other and you would appoint one to ensure that all three are working towards the same objectives. Professional advice comes at a cost but it is a small investment to ensure that everything is set up properly.”

The first step is to decide on the type of business you are running. If you set up as a sole trader, you are classed as a self-employed individual. As well as income tax, you have to pay two types of national insurance: Class 2 contributions, which is a fixed weekly amount of £2.20 this tax year, and Class 4 contributions, which is a percentage of your taxable profits, equivalent to 8 per cent of annual profits between £5,225 and £34,840 this tax year, and then 1 per cent on profits above £34,840.

Another option is to set up as a limited company, which can protect your personal assets should the business run into financial problems. Company directors have various obligations, including filing statutory documents such as accounts and annual returns. You will also be liable for corporation tax on the profits of the company, including any interest and capital gains.

If you are self-employed or run your own business and your taxable turnover exceeds £64,000 this tax year, you also need to register for VAT. Revenue & Customs will normally collect this four times a year.

Whichever route you take, you must inform the Revenue within three months from the end of the month in which you began self-employment. Failure to do so could bring a fine.

By law, you must keep business records for at least five years and ten months after the end of the tax year to which the records relate. The Revenue can charge up to £3,000 for each failure to maintain or retain adequate records.

Business and personal records must be kept separate, and most businesses find that it helps to have a separate business account. Your records should include any sales, with copies of any invoices you have issued, and a record of all business purchases and expenses. You also need to keep details of any amounts you personally pay into or take out from the business, as well as copies of business account bank statements.

Another key point to remember is that you will no longer have the security of any benefits that were provided by your employer, unless you arrange them yourself. These may include pensions, life assurance and private medical insurance.

Jerry Mcloughlin, of Punter Southall, the IFA, says: “Depending on your circumstances, all these may still be necessary. Through an employer, such benefits are provided at low cost, often without medical underwriting. But for individuals they will be more expensive and subject to medical underwriting.”

Leaving employment can also mean the loss of death-in-service benefits, which can be as much as four times your salary. This is a substantial life assurance benefit that you should consider replacing.

Mr Bamford says: “Term assurance is the cheap and simple way of replacing a death-in-service benefit. You can pick the sum assured and the term of the policy to suit your intended retirement age.”

Pension provision is also vital, as you will no longer benefit from an employer making contributions into an occupational scheme. Philip Pearson, P&P, another IFA, says: “For many self-employed people, a stakeholder pension is a simple, good-value route to establishing a pension fund.”

Where to find help

Phone the HM Revenue & Customs helpline on 0845 9154515 or visit its website, www.hmrc.gov.uk, to register as self-employed and to file your tax return online.

Business Link is the Government’s service for the self-employed, offering advice on everything from buying to selling a business.

Phone 0845 6009006 or go to www.BusinessLink.gov.uk.

If your business provides freelance consulting or contract work, the Professional Contractors Group’s Guide to Freelancing includes useful contacts and advice. Download it from www.pcg.org.uk or call 0845 1259899.

CASE STUDY: Flexibility built in

Tom Clowes and Simon Pilkington became self-employed last September when they set up their own building company, Pinnacle Building Projects.

Simon, far left, previously worked as a sponsorship manager for the Football Association and Tom was a corporate team-building event co-ordinator until they decided to go it alone to gain more flexibility in their working lives. Tom says: “I recently got married and Simon has a young family, so the idea of being our own bosses really appealed. I had a bad experience with builders in the past, so our mission was to set up a company to project-manage trustworthy builders to look after a multitude of different projects.”

The South London duo, both 34, set up as a limited company and took advice on how to arrange their finances. Simon says: “We have a bookkeeper who comes in monthly, we became VAT-registered in January and also have professional indemnity insurance and public liability cover.”

They have a NatWest business account and a separate savings account, also with NatWest, into which they transfer money to cover tax and other expenses. Neither has set up a pension, but both plan to do so soon.

Pinnacle Building Projects: 020-7952 4870, www.pinnaclebuildingprojects.co.uk