With more and more people working from home, the side business or ‘side hustle’ has become increasingly popular. Many full time employees are now subsidising their income with trading business run on the side, but how does the accounting and tax work for a side business if you’re already employed?
The Accounting & Tax Academy Free Membership Site:
Sole Trader or Limited Company?
0:47 – How are you taxed as a PAYE employee?
2:13 – What tax options do you have for your side business?
4:06 – How does the tax work for a side business?
7:10 – Some non-tax considerations to take into account
The two main options available to you for a side business are operating as a freelancer / sole trader or making your side business into its own separate legal entity by operating as a limited company.
While operating as a sole trader is more straightforward in terms of paperwork and responsibilities, running your side business this way leaves you without a ‘control valve’. By this, we mean that any and all profit your side business makes in a tax year will go into your annual earnings and be subject to tax, whether you want it to or not.
Operating your side business as a limited company however, gives you control over this. For example, if your company made £25,000 in profit over the course of the year, you could choose to leave this money within your company to use at a later date or invest, or you could take it out as a personal dividend. Since you have control over when these transactions take place, you are able to time your dividends in order to avoid tax. For example, by withdrawing a dividend during a year when your PAYE earnings are less.
Using a limited company for your side business comes with it’s own considerations. For example, Dividend Tax. We’ve included an example for what this would look like if you’re taking a dividend as well as your PAYE salary. It’s worth remembering that you’re dealing with apples & oranges here; your PAYE Salary and your Dividends.
So just because your GROSS annual salary looks to be more than the lower tax bracket, your PAYE salary may still be below this and, thus, not subject to the higher tax bracket of 40%. In comparison, using a Sole Trader vehicle means that all earnings from your side business are classed under your income so you are more likely to end up in a higher tax bracket if your side business begins to gain traction and generate more profit.
We hope this video has helped you develop your understanding on how the Accounting & Tax works for your side business or side hustle and taken you one step closer to knowing your numbers. Have you started a side hustle this year? Let us know how you’re getting on in the comments!