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Whether you’re looking to test the viability of a passion project, or earn some extra money, forming a company while still employed is an avenue that an increasing number of workers are exploring. The safety net of a secure job and regular salary makes for a less daunting journey into the world of small business ownership.
However, before taking the leap, it’s worthwhile understanding the potential tax implications of setting up a company while employed elsewhere. We discuss this in detail below, including your tax registration, filing, and payment responsibilities when trading through a UK limited company.
Registering with HMRC
When you form a company, you must register with HMRC for Corporation Tax within three months of starting to do business. You will be required to pay Corporation Tax on any profit that your company generates.
If you are planning to pay yourself a director’s salary or hire any staff, you must also register as an employer and set up Pay As Your Earn (PAYE). PAYE is the system that HMRC uses to collect Income Tax and National Insurance contributions (NIC) from employment.
You may also have to register for VAT if your company’s VAT-taxable turnover is greater than £85,000 in a 12-month period. If your turnover is below this threshold, you also have the option of voluntary VAT registration, which can provide a number of benefits to small businesses.
Finally, you will have to register yourself for Self Assessment if you pay yourself dividends from shares, claim expenses, or set up a director’s loan account. Self Assessment is the system that HMRC uses to collect personal tax from any income not processed through payroll.
Filing tax returns
As the director of a limited company, you will be responsible for filing tax returns with HMRC. This includes Company Tax Returns, Self Assessment tax returns, and VAT Returns (if applicable).
Filing tax returns will be an alien concept if you’ve never run your own business before, so you may wish to appoint an accountant. However, you are under no legal obligation to do so. If you feel able, you can complete and file these tax returns yourself.
Company Tax Returns
Unless your company is dormant (not trading), you must complete an annual Company Tax Return for HMRC. The purpose of this tax return is to report your company’s profit or loss for the year, and to work out how much Corporation Tax your business owes.
You must deliver your Company Tax Return (including full annual accounts) to HMRC no later than 12 months after the end of the Corporation Tax accounting period that it covers.
Self Assessment tax returns
To report your total personal earnings from all sources, you must complete a Self Assessment tax return (form SA100) each year. This form should include details of your directors’ salary, dividend payments, and the wages and benefits you receive from your main job.
Since you will be receiving income from your company whilst still employed in another job, you will need to complete separate ‘Employment’ pages in the tax return. One for the salary payments and benefits you pay yourself through your company, and another for the wages and benefits you receive from your main job.
There are separate sections for reporting other earnings, reliefs, and repayments – including dividend income from shares, income from UK pensions, state benefits, tax reliefs, and Student Loan repayments.
The deadline for sending your Self Assessment tax return is 31 October (postal filing) or 31 January (online filing) after the end of the tax year.
You will have more than one tax code
HMRC will give you a second tax code for processing your director’s salary. Depending on your tax band, the code will be ‘BR’ (basic rate), ‘D0’ (higher rate), or ‘D1’ (additional rate). You will need to enter the code in your payroll software for PAYE.
HMRC will automatically treat your existing employment as your main job and continue to deduct your annual tax-free Personal Allowance from those earnings. Consequently, the tax code for your existing job should remain as ‘1257L’, which reflects your Personal Allowance of £12,570 for the 2023/24 tax year.
If you register your new company for VAT, you will be required to send quarterly VAT Returns to HMRC online. These returns tell HMRC how much VAT you’ve paid to other businesses and charged to your customers.
You must file a VAT Return, even if you do not have any VAT to pay or reclaim. The deadline for sending these returns is usually 1 month and 7 days after the end of each quarterly accounting period.
Paying tax and National Insurance contributions (NIC)
When running a limited company, you are responsible for paying tax to HMRC. This includes Corporation Tax, Income Tax, National Insurance contributions (NIC), dividend tax, and VAT.
Corporation Tax is payable on any profit your company makes from trading, investments, and selling assets. The profit is the money left over after paying business costs and expenses, including salaries, overheads, and stock.
The amount of Corporation Tax you pay depends on how much profit your company makes in an accounting period. The following rates apply from 1 April 2023:
- 19% ‘small profits rate’ (SPR), if your company generates profits of £50,000 or less
- 25% main rate, if your company makes more than £250,000 profit
For profits between £50,000 and £250,000, you can claim ‘Marginal Relief’. This relief provides a gradual increase in the Corporation Tax rate between 19% and 25%.
The deadline for paying your Corporation tax bill is 9 months and 1 day after the end of your company’s accounting period. This period is usually the same as the financial year in your company’s annual accounts.
Income Tax and National Insurance
As a director and ‘employee’ of your own company, you will be liable to Income Tax and Class 1 National Insurance contributions (NIC) on your director’s salary. The company will also have to pay Class 1 employer’s National Insurance if your salary is greater than £758 per month (the NIC Secondary Threshold).
The amount of tax and NIC you will have to pay will depend on your combined annual income from your main job and your new company. Therefore, you may have to pay Income Tax at 20% (basic rate), 40% (higher rate), and 45% (additional rate) on your director’s salary.
Ordinarily, company directors can minimise their tax and National Insurance by paying themselves a small salary up to the NIC Primary Threshold (£12,570 per year) and taking the rest of their income as dividends. However, this may not be possible, given that you have another job and likely earn above the Primary Threshold already.
What you can do, however, is take all of your earnings from the company in the form of dividend payments, rather than paying yourself a salary. You will still have to pay tax on your dividend income, but the current rates of dividend tax are lower than Income Tax rates. Additionally, dividend income is not subject to NIC.
Whichever way you choose to structure your remuneration, you must pay your Self Assessment tax bill by 31 January after the end of the tax year in which you receive the income.
Value Added Tax (VAT)
VAT-registered companies are required to pay VAT to HMRC if they charge more VAT to customers than they pay to suppliers and service providers. The standard rate of VAT is 20%, which is payable on most goods and services.
If your new company is registered for VAT, and you end up charging more VAT than you pay on your purchases, you must pay the difference to HMRC.
The deadline for paying your VAT bill will likely be the same as the deadline for filing your quarterly VAT Return—1 month and 7 days after the end of the VAT accounting period.
If you pay more VAT on purchases than you charge to customers, HMRC will repay the difference to your company.
Ready to form a new company?
Whatever your reasons for doing so, forming a company while still employed has the potential to be a worthwhile endeavour. Especially in the current cost of living crisis that is affecting so many UK workers.
Whilst there are tax implications to bear in mind, you’ll be happy to hear that the company formation process itself is really straightforward.
You can set up a company online through Rapid Formations for as little as £12.99 (+VAT). Simply follow our 4 Steps to Forming a Company, and your new side business could be ready to start trading on the very same day.
If you have any questions or require assistance, please contact our company formation team for help. You can also find out more about all of the topics discussed throughout this article by visiting the Rapid Formations Blog.