Tax implications of starting a business while still employed

Many business owners decide to start their businesses while still employed, running their businesses during the evenings and weekends. If you’re thinking of starting your own ‘5 to 9’ business, here’s a quick guide to the tax implications you’ll need to consider.

You’ll need to register with HMRC

You’ll need to make sure HMRC knows about your business, no matter how small it is. If you’re setting up as a sole trader, register with HMRC here.

If you’re going to set up as a limited company, you’ll need to register with Companies House, which you can do either directly, through an accountant, or through a specialised formation agent. Companies House will then notify HMRC that your new company is active. You may then also need to register as an employer if you want the company to pay you a salary, or to hire staff. And you’ll also need to let HMRC know that you’re now subject to Self Assessment as a director.

You’ll have to start filing a tax return

If you’ve only ever earned money through a job up till now, you may have never needed to fill in a tax return, but as a business owner, you’ll have to start!

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Your tax return needs to include all your income, so you’ll need to fill in a set of employment pages for the salary and any benefits or expense repayments you receive from your day job.

If your business is a limited company, you’ll need to fill in another set of employment pages for the salary the company pays you, and any benefits it provides to you (such as private medical care) and expenses it reimburses to you.

If your business is sole trade, you’ll need to fill in a set of self-employment pages as well. If you have more than one sole trade, you’ll need to fill in a set of self-employment pages for each trade.

You may get a second tax code

Your tax code is the mechanism that your employer uses to deduct a particular amount of income tax from your wages each month. It tells your employer’s payroll software how much tax to take off your wages under the PAYE scheme. HMRC tells your employer which tax code to use for you, depending on your individual circumstances.

If you’re running your business as a limited company and the company pays you a salary, you’ll get a second tax code from HMRC for your salary from the limited company. Usually, your tax code on your existing job will reflect your personal allowance and your second tax code will not reflect any allowance.

If you’re running your own business as a sole trader, then you’ll only have one tax code (assuming you only have one day job!). As a sole trader, you pay tax on your business profits in your tax return rather than as a part of your wages, so the tax code that your employer uses for you shouldn’t be affected.

You’ll pay extra National Insurance Contributions (NIC)

As an employee, you will already pay class 1 employees' NIC on your wages from your day job. These are deducted from your salary along with Income Tax, and your employer pays them to HMRC on your behalf.

If you’re also employed by your own limited company, then you’ll also pay class 1 employees' NIC on your wages from that company, once they go above a level called the primary threshold. The company will also have to pay additional employers' NIC on wages above the secondary threshold (since 6th April 2014 these two thresholds have been the same figure).

If your business is a sole trade, you could pay two kinds of National Insurance:

  • Firstly, you’ll usually have to pay a flat rate of class 2 NIC. If your profits are under the limit for that tax year (£5,965 as from 6th April 2016), then you can apply to be exempt from class 2 NIC, and this shouldn’t affect your entitlement to State Pension and other benefits if you’re also paying class 1 NIC on your wages.
  • You’ll also pay class 4 NIC on your business’s profits - and you can apply to defer your self-employed NIC if you’re paying enough class 1 NIC on your wages.

All businesses, no matter how small and simple, are subject to tax rules, so if you’re not sure what your obligations will be once you’ve started your own business, have a chat with an accountant. If you don’t have an accountant, check out our Find an Accountant directory.

Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.

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