As we discussed last week in our “Starting a Business While Working Full Time” series - starting your business while working full time is a popular and safer route for budding entrepreneurs. Last week we highlighted some tips to help you do so. This week however we will delve into the tax considerations to starting your own business while still working full time. All going well, your side business will start generating an income, some of which might even include profit. Additional income, while a great thing, needs to be accounted for correctly with the Taxman to avoid problems further down the line.
How to register the business
After the plans have been made and your business idea is solid, the next big move is to inform HMRC that you have set up a business. To do this there are generally two options either registering as a sole trader via this link or to registered as a limited company. Here at Company address we offer company formation services - you can choose from a range of services and we will deal with Companies House for you, support you along the way and we send you your incorporation documents when your company has been registered. Companies House will then be the one to send a notification to HMRC about the company that has been registered and that it is active. If the business is going to be paying a salary to the owner or to any staff that they would be hiring, it should also be registered as an employer. It is important that HMRC is informed about this since it would mean that the person setting up the business would be subject to a Self-Assessment.
Filing tax returns
As an employee in the UK, you do not have to fill out your own tax returns. This all changes when you start your own business. In the tax return, a person should indicate all the income that they get. There is a set especially for employment which would include details of the salary, benefits, and repayments of expenses received from being employed. For a limited company, a person has to fill out another page which would ask for information on salary from the company, benefits, and reimbursed expenses. For sole traders, a person has to fill out a page which would ask for information on self-employment.
The second tax code
The tax code is used by employers to deduct the income tax from the monthly wages. It informs employers how much tax should be taken based on the PAYE scheme. This code will come from the HMRC and it is dependent on a person’s circumstances. As a limited company owner and one gets a salary from it, he or she will be given a second tax code supplied by the HMRC. This is solely for the salary received from the limited company. The original tax code from the so-called “day job” will include personal allowances. The second tax code will reflect such. As a sole trader, a person will only have one tax code. Taxes are paid based on the profits from the business. There will be no effect on the tax code from being employed.
Extra payment for National Insurance Contributions
Employees already pay the NIC under class 1 from their salaries. The deducted amount is then paid by the employer to the HMRC. Those who have their own limited company would need to pay the class 1 employees’ NIC from the salary they receive from the company when they go above the primary threshold. The company will be paying additional employers’ NIC from the salary that are above what is known as the secondary threshold. Those who are sole traders would pay two types of the NIC. The first one is a flat rate under the class 2 NIC. A person’s profits that do not reach the limit for a tax year can be applied for exemption from the class 2 NIC. This wouldn’t affect a person’s right to State Pension as well as other benefits if they are already paying the class 1 NIC from their salary. A person also has to pay for class 4 NIC from the profits of the business. Exemption from this can be applied if a person is paying a good amount under the class 1 NIC from his or her salary.
While the above information may seem like a lot to digest - it is very important that you make sure you know what taxes you should be paying when you register your company, the last thing you want as a new business owner is to be fined for failure to declare. If you are still concerned, we suggest talking to an accountant - if you need a recommendation - contact our team on office@companyaddress.co.uk and we would be happy to put you in touch with our accounting partners based in London.
published under Business Address Guides
