Continuing our current series of guides on starting a new business venture, we’re taking a look at a large but mostly forgotten sector – part-time business owners.
A part-time business owner will be in full time, or part-time, employment, looking after their business as and when they can – during holidays, in the evenings or at weekends. You can think of it as a kind of ‘hobby’ business, where the owner is looking to make a little extra cash or, may be, just dipping their toe into something before taking the plunge.
Running a business parallel with the main job is usually a great way to start earning extra money. However, as with any new venture, it must be registered with HMRC and all the other paperwork must be in order. It may be small beer at the start but, if it develops into a full-time concern, the paperwork has to be in order from the start.
So, what are the main factors to consider when starting a part-time business?
- Do you need to register with HMRC: If you’re earning, HMRC need to know. So, when you set up any business you will need to register with HMRC as self-employed or as a limited company. If you don’t, you could find yourself on the wrong end of a hefty fine!
- What is the best legal structure for my business? Choose whether you will operate as self-employed or through a limited company. This can be quite an important decision when you are employed elsewhere as you’ll see below.
- Is this a hobby or the start of something big? Managing a growing business on a part-time basis is difficult. Priorities are spread thinly, time is precious and workload is often immense. You will need to decide whether making sacrifices elsewhere will benefit your new venture.
How should I set up my business?
If you are employed on a full, or part-time basis, your tax-free personal allowances will usually be fully utilised already. So, you need to consider the best way to set up your business. Any additional income you make could be taxed at the full rate without any tax allowance deductions. What that means is you could be giving the Taxman up to 50% of profits each year! You really don’t want to do that.
So, here are some of the factors that will help you decide the best business structure:
- Am I a basic or higher rate tax payer?
- Will I invest profits into the business or spend them personally>
Answering these question will help you make the correct decision in becoming either a sole trader or limited company.
Why? Well, For example, if you’re a higher rate tax payer and are a sole trader, all profits generated will be taxed at 40% plus 9% National Insurance. But, if you set up a limited company and decide not to take out any money, profits charged to corporation tax would be 20%.
Generating profits of £15,000 a year could result in a tax bill difference of around £4,350!
However, things start to get muddier if you decide to take money out of the limited company. Taking all available profits from the company would reduce the tax savings down to approx. £1,500 – that’s still a saving though!
Although deciding upon the best tax efficient structure for your business is important, you need to consider what the best structure is for yourself. Our blog post what’s the best business structure for me? discusses the various issues around this.
As you cannot retrospectively alter the business, making important decisions like this before you start in business will save you paying over unnecessary tax to HMRC.
After all, no-one like paying too much tax!