Tax implications of registering a company while still employed

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 small business ownership.

However, before taking the leap, it’s worthwhile to understand the potential tax implications of setting up a company while employed elsewhere. We discuss this 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 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 You Earn (PAYE). PAYE is the system that HMRC uses to collect Income Tax and National Insurance contributions (NIC) from employment.

• At a glance – annual accounts, tax returns, Corporation Tax and Self Assessment
• Do I need to inform HMRC I have set up a limited company?
• The P45 – what employers need to know

You may also have to register for VAT if your company’s VAT-taxable turnover exceeds £90,000 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 for Self Assessment if you pay 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. You can complete and file these tax returns yourself if you feel able.

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 must complete separate ‘Employment’ pages in the tax return. One is for the salary payments and benefits you pay yourself through your company, and the other is for the wages and benefits you receive from your primary 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 to process 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 (if applicable) from those earnings. If you’re entitled to the standard Personal Allowance of £12,570, your tax code for your existing job should remain as ‘1257L’. The code will be different if you’re earning more than £100,00 per year.

VAT return

If you register your new company for VAT, you must send a quarterly VAT Return 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

Corporation Tax is payable on any company profit 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 onwards:

• 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 gradually increases the Corporation Tax rate between 19% and 25%.

The deadline for paying your Corporation tax bill is 9 months and 1 day after your company’s accounting period ends. 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 employer’s Class 1 National Insurance if your salary is greater than £417 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. If you live in Scotland, you’ll pay slightly different rates of Scottish Income Tax instead.

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 register a new company?

Whatever your reasons for doing so, registering a company while still employed has the potential to be a worthwhile endeavour. While there are tax implications to consider, you’ll be happy to hear that the company formation process is straightforward.

You can register a company online through Rapid Formations for as little as £2.99 (excluding the £100 Companies House fee). Simply follow our 4 Steps to Forming a Company, and your new side business could be ready to start trading on the same day.

If you have any questions or require assistance, please contact our company registration team for help. You can also find out more about all of the topics discussed throughout this article by visiting the Rapid Formations Blog.