Employed and self-employed considerations

According to Luke Johnson, one of Britain’s most successful entrepreneurs and the author of Start It Up, “running your own business is easier than you think”. 

But what happens if, like many people you are a little cautious about trading in your current job and taking the plunge? What if, instead, you want to keep working for your current employer whilst running your own business on the side?

If so, there are some considerations and future actions you need to be aware of in respect of tax.

This article looks at the tax implications of being employed and self-employed, looking specifically at the Income Tax/PAYE side. Be aware however there are other areas you will need to be know of potentially too such as VAT.

So let’s tackle what you need to consider for the self-employed part

Firstly you need to decide what type of business you will be.  This is important as the decision you make will determine what and when information needs to be submitted to HMRC.

For this article I have assumed an individual would look to start their business as a sole trader but there are a number of different types of business, depending on your circumstances, such as a Limited company or perhaps a business partnership.  A sole trader doesn’t mean you couldn’t employ someone and must work alone, it just means you are responsible for the business and are personally responsible for any losses your business makes and liabilities it incurs.

From a tax perspective you will need to report your income received via a self-assessment form each year, pay income tax on any profits your business makes and pay National Insurance.

As a sole trader your key responsibilities are:

  • Register with HMRC and the advice is to do this as soon as possible after starting the business, but at the latest, you    should register by 5 October in your business’s second tax year;
  • Keep records of your business’s sales and expenses;
  • Pay income tax on your profits and National Insurance. As the Chancellor announced in Budget 2016, Class 2 National    Insurance for the self-employed will be abolished and only Class 4 will be payable to simplify the National Insurance    system.
  • Your business debts;
  • The paying of bills for anything you buy for your business;
  • Registering for VAT if your turnover reaches the VAT threshold of £82,000

How do you register?

You should always aim to register online as its much quicker and less hassle. How you register depends on whether you are a new sole trader who hasn’t sent in any tax returns before or not.

Not sent in a return before

Previously sent in returns

  • Register for National Insurance (at the time of writing via a CWF1)
  • Ensure you know your 10-digit Unique Taxpayer Reference (UTR) to ensure HMRC can link your tax records; this will be critical when being employed or having other income you report.

Your employment

There is no reason why you shouldn’t retain your current tax code and would most likely do this as your employment income may well be higher than your new business profits, especially if on the normal personal allowance tax code and earn over the tax threshold, currently £10,600 pa (£11,000 from 6 April 2016).

However, your tax code might change when you submit your businesses profits via the self-assessment form. If, you owe HMRC less than £3,000 on your tax bill and you submitted your paper return by 31 October or online by 30 December, then HMRC will recover the tax due through your employment tax code.  Three conditions must be met to have tax recovered in this way:

  • You have sufficient income to collect the tax;
  • You won’t end up paying more than 50% of your pay in Income Tax (payroll systems would prevent this);
  • You wouldn’t pay more than twice as much tax as you normally do (50%)

The way HMRC would calculate your adjustment for the tax code would be to divide the tax you owe by 12 equal monthly installments (from the start of the next tax year).

Adjusting your tax code is the normal route HMRC use for recovering underpaid tax, but If you specifically ask them not to use this method then you will need to pay your bill via other methods eg. through a one off payment to HMRC.

Employment contract

Just as an observation, if you plan to set up a new business, do check your employment contract.  Your employer may have included a cause that prevents you working for someone else and or setting up your own business.  Clearly they wouldn’t be happy if you were setting one up in direct competition.

Conclusion

You can set up on your own, or with employees, but need to decide what type of business you will be. You can change the type at a later date but there will be tax consequences, so seek advice. As a sole trader you will report your income and profits by way of a self-assessment return.  HMRC will link your employment and your business income records to ensure you pay the right amount of tax.  This might be via your tax code, or via other payment methods, depending on the amount owed and your choices.

It just leaves me to say, if you decide to embark on a new idea and start your own business; all the very best of luck.

You can find more information on starting a business and the tax obligations via Business Legal Structures.

Karen Thomson is director of group payroll services at Armstrong Watson.

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