Whether you’re seeking to test the viability of a passion project or earn some extra cash, forming an organization while still employed is an avenue that an increasing variety of staff are exploring. The security net of a secure job and regular salary makes for a less daunting journey into the world of small business ownership.
Nevertheless, before taking the leap, it’s worthwhile understanding the potential tax implications of organising an organization while employed elsewhere. We discuss this intimately below, including your tax registration, filing, and payment responsibilities when trading through a UK limited company.
Registering with HMRC
While you form an organization, it’s essential to register with HMRC for Corporation Tax inside three months of beginning to do business. You can be required to pay Corporation Tax on any profit that your organization generates.
If you happen to are planning to pay yourself a director’s salary or hire any staff, it’s essential to also register as an employer and arrange Pay As Your Earn (PAYE). PAYE is the system that HMRC uses to gather Income Tax and National Insurance contributions (NIC) from employment.
It’s possible you’ll also need to register for VAT if your organization’s VAT-taxable turnover is larger than £85,000 in a 12-month period. In case your turnover is below this threshold, you furthermore may have the choice of voluntary VAT registration, which may provide various advantages to small businesses.
Finally, you should have to register yourself for Self Assessment for those who pay yourself dividends from shares, claim expenses, or arrange a director’s loan account. Self Assessment is the system that HMRC uses to gather personal tax from any income not processed through payroll.
Filing tax returns
Because the director of a limited company, you can be answerable for filing tax returns with HMRC. This includes Company Tax Returns, Self Assessment tax returns, and VAT Returns (if applicable).
Filing tax returns can be an alien concept for those who’ve never run your individual business before, so it’s possible you’ll want to appoint an accountant. Nevertheless, you might be under no legal obligation to achieve this. If you happen to feel able, you’ll be able to complete and file these tax returns yourself.
Company Tax Returns
Unless your organization is dormant (not trading), it’s essential to complete an annual Company Tax Return for HMRC. The aim of this tax return is to report your organization’s profit or loss for the 12 months and to work out how much Corporation Tax your enterprise owes.
You need to deliver your Company Tax Return (including full annual accounts) to HMRC no later than 12 months after the top of the Corporation Tax accounting period that it covers.
Self Assessment tax returns
With a view to report your total personal earnings from all sources, it’s essential to complete a Self Assessment tax return (form SA100) every year. This manner should include details of your directors’ salary, dividend payments, and the wages and advantages you receive out of your foremost job.
Because you can be receiving income from your organization whilst still employed in one other job, you will have to finish separate ‘Employment’ pages within the tax return. One for the salary payments and advantages you pay yourself through your organization, and one other for the wages and advantages you receive out of your foremost job.
There are separate sections for reporting other earnings, reliefs, and repayments – including dividend income from shares, income from UK pensions, state advantages, 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 top of the tax 12 months.
You’ll have multiple tax code
HMRC will provide you with a second tax code for processing your director’s salary. Depending in your tax band, the code can be ‘BR’ (basic rate), ‘D0’ (higher rate), or ‘D1’ (additional rate). You will want to enter the code in your payroll software for PAYE.
HMRC will robotically treat your existing employment as your foremost job and proceed to deduct your annual tax-free Personal Allowance from those earnings. Consequently, the tax code on your existing job should remain as ‘1257L’, which reflects your Personal Allowance of £12,570 for the 2023/24 tax 12 months.
If you happen to register your latest company for VAT, you can 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 need to file a VAT Return even for those who would not have any VAT to pay or reclaim. The deadline for sending these returns is frequently 1 month and seven days after the top of every quarterly accounting period.
Paying tax and National Insurance contributions (NIC)
When running a limited company, you might be answerable 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 organization makes from trading, investments, and selling assets. The profit is the cash left over after paying business costs and expenses, including salaries, overheads, and stock.
The quantity of Corporation Tax you pay relies on how much profit your organization makes in an accounting period. The next rates apply from 1 April 2023:
- 19% ‘small profits rate’ (SPR) if your organization generates profits of £50,000 or less
- 25% foremost rate if your organization makes greater than £250,000 profit
For profits between £50,000 and £250,000, you’ll be able to claim ‘Marginal Relief’. This relief provides a gradual increase within the Corporation Tax rate between 19% and 25%.
The deadline for paying your Corporation tax bill is 9 months and 1 day after the top of your organization’s accounting period. This era is frequently similar to the financial 12 months in your organization’s annual accounts.
Income Tax and National Insurance
As a director and ‘worker’ of your individual company, you can be liable to Income Tax and Class 1 National Insurance contributions (NIC) in your director’s salary. The corporate can even need to pay Class 1 employer’s National Insurance in case your salary is larger than £758 monthly (the NIC Secondary Threshold).
The quantity of tax and NIC you should have to pay will rely on your combined annual income out of your foremost job and your latest company. Due to this fact, you will have to pay Income Tax at 20% (basic rate), 40% (higher rate), and 45% (additional rate) in your director’s salary.
Ordinarily, company directors can minimise their tax and National Insurance by paying themselves a small salary as much as the NIC Primary Threshold (£12,570 per 12 months) and taking the remaining of their income as dividends. Nevertheless, this may occasionally not be possible, provided that you’ve got one other job and certain earn above the Primary Threshold already.
What you’ll be able to do, nonetheless, is take your whole earnings from the corporate in the shape of dividend payments, somewhat than paying yourself a salary. You’ll still need to pay tax in your dividend income, but the present rates of dividend tax are lower than Income Tax rates. Moreover, dividend income is just not subject to NIC.
Whichever way you select to structure your remuneration, it’s essential to pay your Self Assessment tax bill by 31 January after the top of the tax 12 months during which you receive the income.
Value Added Tax (VAT)
VAT-registered corporations are required to pay VAT to HMRC in the event that they charge more VAT to customers than they pay to suppliers and repair providers. The usual rate of VAT is 20%, which is payable on most goods and services.
In case your latest company is registered for VAT and you find yourself charging more VAT than you pay in your purchases, it’s essential to pay the difference to HMRC.
The deadline for paying your VAT bill will likely be similar to the deadline for filing your quarterly VAT Return—1 month and seven days after the top of the VAT accounting period.
If you happen to pay more VAT on purchases than you charge to customers, HMRC will repay the difference to your organization.
Able to form a latest company?
Whatever your reasons for doing so, forming an organization while still employed has the potential to be a worthwhile endeavour. Especially in the present cost of living crisis that has effects on so many UK staff.
Whilst there are tax implications to remember, you’ll be completely happy to listen to that the corporate formation process itself is admittedly straightforward.
You’ll be able to arrange an organization online through Rapid Formations for as little as £12.99 (+VAT). Simply follow our 4 Steps to Forming a Company and your latest side business could possibly be ready to begin trading on the exact same day.
If you’ve got any questions or require assistance, please contact our company formation team for help. It’s also possible to discover more about all the topics discussed throughout this text by visiting the Rapid Formations Blog.