The side hustle has been the entry point for many an entrepreneur that is looking to set up and start their own business. It allows you to pilot your idea, iron out any kinks and stress test whether the idea / business is something you truly want to pursue. In our current climate (ahem, thank you cost-of-living crisis) the side hustle is becoming ever more popular. But what does it mean from an accounting perspective, how do you manage your new business whilst still being in full time employment?) Read on for our top tips!
Get registered with HMRC
No matter how small your business is, you need to make sure HMRC knows about it. The threshold for this is £1,000 per year in sales (before you take any costs off). The only question is whether you set up as a sole trader or a limited company, take a look at our previous blog on which might be best suited to you here.
You will need to file tax returns
Do not worry, there is plenty of help and support available, but you will need to file a tax return. If you have always been in employment, it will be unlikely that you’ve had to do one of these before. You will need to detail all income whether that be through employment or your side hustle.
You may get a second tax code
Your tax code tells your employer’s payroll software how much Income 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 this salary. 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 and you only have one job, you’ll only have one tax code. As a sole trader, you pay tax on your business profits in your Self Assessment tax return rather than as a part of your wages, so your tax code won’t be affected unless you specifically ask HMRC to collect your tax through your tax code. You would do that when you file your tax return.
You’ll pay extra National Insurance contributions
As an employee, you will already pay class 1 employees’ National Insurance (NI) contributions on your wages from your job. These are deducted from your salary along with Income Tax, and your employer pays them to HMRC on your behalf.
If you’re employed by your own limited company, then you’ll also pay class 1 employees’ NI contributions on your wages from that company, once you earn above the primary threshold. The company will also have to pay additional employers’ NI contributions on wages above the secondary threshold.
If you’re a sole trader, you could pay two kinds of National Insurance:
• Firstly, you’ll usually have to pay a flat rate of class 2 NI contributions if your taxable income exceeds the Lower Profits Threshold (£11,908 for the year 2022/23, rising to £12,570 for the year 2023/24). If your profits are between the Small Profits Threshold (£6,725 for the year 2022/23 and 2023/24) and the Lower Profits Threshold, you do not have to pay class 2 NI contributions in order to keep your entitlement to State Pension and other state benefits. If your profits are below the Small Profits Threshold, you may choose to pay class 2 NI contributions voluntarily in order to keep your entitlement to these state benefits, though the amount will also depend on how much you’re paying in employee’s NI deducted from your wages. If you’re in any doubt, speak to HMRC or your accountant.
• You’ll also pay class 4 NI contributions on your business’s profits if your profits exceed £11,909 a year for the year 2022/23, or £12,570 for the year 2023/24.
Thinking of starting your side hustle but unsure on what to so with your accounting admin? Speak to our friendly team, we can help support you so you can focus on what you do best, being awesome! Contact us here.