Something on the side? Benefits, registration, and tax
The goal of running your own business is one shared by many. While those who have the time, resources, and desire to dive in without looking back, it’s easier to quit the day job and commit 100pc to your new venture.
For others, this may not be an option, or they may prefer to wade in, in order to test the waters and get their footing. There are a number of reasons to keep your day job while taking the first steps toward self-employment.
Benefits of working on the side
While it’s exciting to see a great concept for a business start to come to life and often tempting to hand in your resignation as soon as you purchase your domain name, there are some solid arguments for holding off a bit before you commit all of your time.
However, before you get started, take a look through your current employment contract to make sure there are no clauses that prohibit you from holding another job. Some employers are strict, while others accept outside work as long as it doesn’t represent competition or interfere with your daily work.
Today, over one third of employees in the UK have a side business. Here's a few reasons why they might choose to pursue their goals while keeping the full-time position:
- Lower risk: Keeping your employment while working on building your side business clearly puts you in a less risky position in terms of finances. Because you still have your full-time salary, you can also set money aside to invest in your new venture.
- Rainy day money: Should you encounter any obstacles or difficulties along the way, your salary can provide you with some cushion that you may not have if you jumped immediately into full-time self-employment.
- Networking aspect: This is not to say you should poach customers from your employer, but if you are in a position to meet people in the field of your private business, it is much easier to use an established network rather than starting out on your own.
Employment, self-employment, and tax
It’s important to register as self-employed as soon as your side business begins to make money. Many argue that it’s preferable to register as soon as you get started.
Registering as self-employed does not affect your employment status or your PAYE for your full-time position. In this way, you’re both employed and self-employed. HMRC does not report your status to your employer.
It’s important to register in order to be eligible for the personal allowance and to claim any deductibles at tax time. The current personal allowance is £11,000. So, if your side business earns you less, you can claim this against tax, as well as your expenses.
You will still be taxed the standard rates for your full-time position.
And National Insurance?
Your National Insurance for your full-time position is unaffected - this is Class 1. When you register as self-employed as well, you will qualify for Class 2 if you make more than £5,965 and it will work out to £2.75 per week.
If your business is earning more than £8,060 each year, you will also be placed in Class 4 with a 9% rate. Your rates are paid through your self-assessment. Read more on GOV.UK.
Sole trader or Limited Company
Where your business is and what your expectations are for growth can help you determine whether to register as a sole trader or form a limited company.
As a sole trader, you hold full responsibility for your business financially. A limited company is an entity in and of itself so lessens the weight of personal liability. However, a limited company comes with more complex tax regulations.
It’s always possible to start as a sole trader and form a limited company further along.
Making the transition to your business
The step from employed to fully self-employed is a big one. While it can go smoothly, it’s still important to take the time to consider what’s right for you and your business.
Taking stock of your resources, your time, and your expectations is important as you progress and will contribute to the reward of running your own business.