Setting up a business while still employed can appear difficult and perilous. Many people are concerned about losing their job stability and being sanctioned for moonlighting if their employer finds out.
Creating a side business is something that an increasing number of people are doing. In most circumstances, there should be no legal obstacles to starting a limited corporation while working. However, there are certain things to think about before taking the plunge.
Although it is certainly possible, there are some factors entrepreneurs should examine before registering their limited company alongside their current work. One such subject to think about is the legality of registering your firm.
If you wish to start a side business, the good news is that there are no legal restrictions. While it may appear stressful to run a business on the side while working full-time, hundreds of small business owners have successfully started their enterprises while working full-time.
However, this does not mean that the process is without difficulties. Here we cover all you need to know before taking the jump and starting your own business while still working.
Steps to consider when starting a limited company whilst employed
Understand your employment contract
Your employment contract may contain certain disclosures that you should be aware of as these may prevent you from beginning a business while working full-time.
Some employment contracts require employees to work exclusively for them and not undertake any other business interests. You may therefore be wise notifying your employer if you start a side business to make them aware.
In some instances, if you develop intellectual property as part of your full-time work and your new self-employed business will develop the same items or use similar technology, you may be required to comply with conflict of interest disclosures and non-disclosure agreements.
Furthermore, if you develop anything for your own firm using company resources and on company time, it may become your employer’s intellectual property, leaving you without your work and in serious contract breach.
Some companies will even incorporate non-compete agreements that restrict you from leaving to work for a direct competitor and allow the corporation to take legal action against a business of your own invention that they regard as a direct threat.
Ensure you have thoroughly gone through each page of your contract, since terms like the ones above can complicate the process of beginning your own business, and that’s before you factor in the additional complexity of starting a business while working.
If at all possible, ensure that your new side business has no ties to your existing work. If there are parallels, you must be able to demonstrate that the work, research, and ideas are entirely yours and that they were generated independently, away from your current job and its resources.
Save up your side income
When your side business begins to generate a profit, it may be tempting to become engrossed with the advantages of having two incomes.
This is not sustainable, and it may affect your firm in the long term if you leave your full-time role because you may have emptied a fund that could sustain you.
Set economic restrictions for yourself early on to avoid yourself from spending above your starting means. Choosing to invest or preserve your profits will help relieve tension when you eventually become totally self-employed by providing a future safety net. An accountant can help you map out your finances and offer expert financial advice.
Limited company tax implications
Extra money is always welcomed, but you must disclose it to HMRC. If you are forming a business, you must register for:
- Corporation Tax is the payment of tax on company profits.
- Pay As You Earn (PAYE) is a method of paying Income Tax and Class 1 National Insurance on your director’s salary.
- Self-assessment entails declaring all sources of income (work, corporate salary, dividends) and paying dividend tax.
- VAT – if your company’s VAT taxable turnover exceeds £85,000, you must charge, pay, and reclaim VAT.
HMRC will most likely issue you with a second tax code if you decide to pay yourself a director’s salary through PAYE. This code will not be the same as the one used by your company.
Depending on your total annual earnings from your current job and your new business, you may wind up paying higher (40%) and additional (45%) income tax rates. It is therefore recommended that you consult an accountant when starting out.
Remember this while determining how to pay yourself through a limited company. You may discover that it is more advantageous from a tax standpoint to keep/reinvest some of the income in the company.
Companies House Director Registration
One thing to keep in mind when founding a Limited (LTD) Company is that information about the company’s directors is made public on Companies House.
This means that your information, such as your name and registered address, will be publicly available and could be discovered if an employer or co-worker googles you.
It’s important to consider if you can’t use your real address as a virtual address.
Pensions and savings
If you contribute to your pension, the UK government offers very generous income tax breaks. The majority of people do not contribute enough to their retirement funds.
Tax reduction is available on private pension contributions of up to 100% of your annual earnings. The UK government has a superb webpage that covers all of the great tax relief benefits.
Running a limited company while employed FAQs
Can I set up a limited company while employed?
In most circumstances, there should be no legal obstacles to starting a limited corporation while working.
Do I need to tell my employer if I start a business?
While there is no legal requirement to inform your employer if you own your own business, there may be a stipulation in the employment contract requiring the employee to reveal any other work.
Do you pay less tax as a limited company?
Limited corporations, unlike sole proprietors, do not pay income tax or national insurance, but instead pay corporation tax on business profits minus authorised expenses.
Looking for expert support with your new limited company?
At Raw Accounting, our chartered accountants can give you expert advice on your journey to setting up a limited company, as well as offering a dedicated accountant who will be there for you every step of the way.
Our services include:
- Preparing your self-assessment tax return
- Bookkeeping and accounting
- Re-establishing your tax position
- Financial advice
Get in touch today for a free no obligation chat.
