setting up a business whilst already employed can seem daunting and a little treacherous. Many people worry about losing the security of their employment and being sanctioned for moonlighting if their employer was to find out.
However, plenty of entrepreneurs successfully started their own businesses whilst working for someone else. Notable examples include Twitter founder and CEO Jack Dorsey, Salesforce founder and director Marc Benioff and Spanx founder Sara Blakely.
Although it can clearly be done, there are things entrepreneurs need to consider before they rush off and register their business alongside their existing employment. One such area to consider is the legalities surrounding registering your business.
Here are the things to consider when forming your own business whilst in employment.
Setting Up A Limited Company While Employed
Companies House Director Registration
One important thing to bear in mind when forming a Limited (LTD) Company is that information regarding the directors of the company is made publicly available on Companies House.
This means that as you are likely to be a sole, or co-founder, your information including your name and registered address will be publicly accessible, and could be discovered should an employer, or colleague, ever google you.
Whilst there are preventive steps you can take to minimise this, examples of which can be found in our blog here: The Implications of a Registered Office Address, it is something to bear in mind if you cannot substitute your real address for a virtual address, or have the name of another director registered.
Registering with HMRC
The moment that you begin commencing business activities, you must register as self-employed with HMRC. It does not affect the status of your existing employment which will continue to be taxed by PAYE in the same way.
Usually you are required by law to register with HMRC at the point where you start receiving income from your business, but it is advisable to do so when beginning your formation, especially if you will initially be incurring expenses.
Paying National Insurance Contributions (NIC)
When in employment you automatically pay Class 1 Employees NIC on your wages. These are deducted from your salary alongside your Income Tax, and your employer then pays those to HMRC on your behalf.
However when employed by your own Limited Company, you will then pay Class 1 Employees NIC on any wages you receive from your own company once they go above the primary threshold. At the time of writing the threshold is £183 per week.
Your company will also be required to pay additional employers’ NIC on wages that exceed the secondary threshold, which at the time of writing is calculated if your profits exceed £6,475 a year.
Self Assessment Tax
A majority of the time, your personal allowance (which at the time of writing is £12,500) will be utilised in full against the income you receive from your employment. This means that any profits your business makes will be subject to tax.
To do this, you are required to file a Self Assessment tax return annually where you must report the details of your business income and expenses – even if there initially aren’t any to report.
On the form you must also include details of your employment income.
Tax that you have already paid via PAYE will be taken into account when calculating the tax either payable or refundable at the end of the tax year.
In the early years of trading, if your expenditure is expected to be more than your income Limited Companies are granted no provisions to relieve the losses against current or prior employment income.
Costs relating to business activities will however be allowable deductions, for example equipment costs, travel expenses and office overheads.
When Registering as a Sole Trader
When registering as a sole trader, there is no need to register with Companies House and your details will therefore not be made publicly available.
Sole Traders simply need to register for Self Assessment with HMRC, here. It is a legal requirement to register if your profits exceed £1,000.
National Insurance Contributions (NIC)
If you register as a sole trader, you will pay two types of National Insurance.
The first rate will be a flat rate of Class 2 NIC. This means that if your profits are under the threshold for the tax year (at the time of writing the threshold stands at £6,475) then you will be able to apply to be exempt from Class 2 NIC. This won’t affect your entitlement to State Pension, nor any other benefits if you’re also paying Class 1 NIC on your wages.
The second rate you will need to pay is Class 4 NIC on your business’s profits. However, if you are paying enough Class 1 NIC on your wages you can apply to defer your self-employed NIC.
As a sole trader you keep all your business’s profits, but you must pay tax on them.
Your Income Tax will be calculated on your total earnings, so you’ll be paying tax on both your combined income from your employment and any profits received from your sole tradership.
Keep in mind that if your sole trader profits exceed a tax band threshold, you will automatically move into the higher band and pay the higher rates because of the combined totals.
At the time of writing, the current rates are calculated like so:
- On the basic income tax rate, you’ll pay tax of 20% on all earnings above your personal allowance (£12,500 at the time of writing) and below the threshold of the basic rate, which at the time of writing is £37,500.
- On any earnings above the basic rate, you’ll incur income tax of 40% above the threshold unless your earnings push you into the higher rate band, which at the time of writing is £100,000.
When preparing your Self Assessment tax return, you will need to disclose the tax you have already paid on earnings from your employer.
This is to make HMRC aware that you have already paid tax on part of your total earnings. The amount of tax you owe will be worked out by HMRC once you submit your Self Assessment tax return.
Lastly, whether you are registering a LTD Company or as a sole trader, it is advisable to check your employment contract.
Some contracts will have clauses regarding individuals taking on projects or secondary sources of income, and it’s therefore important to ascertain whether or not you would be at risk of breaching your contract.
While any tax affairs and business dealings with HMRC are entirely confidential, Limited Companies must be aware of their information being made publicly available through Companies House. This is where a breach of your employment contract could occur, if your employer was to discover the registration.
At MachFast, we never recommend misleading your employer, even though it is possible to start your own business without the need to disclose this information.
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