How to run a side business

How to run a side business

Starting a side business can be an exciting way to make some extra money. It’s also an opportunity to test your business idea without the pressure of making it your sole income.

When you start a side business there are a few things you need to consider. From preparing to start your business to paying tax, here’s what you need to know.

Check your employment contract

If you’re thinking of starting a side business the first thing you need to do is check your employment contract. There might be restrictions on working with competitors, the types of work you can do, or if you can have another business.

If your contract allows you to work around your job, then whether you tell your employer about your side business is generally up to you!

Make a business plan

A business plan helps you get your idea on paper, and work out the steps to take to bring your business to life. You can also take this as an opportunity to write a business budget too.

Your business plan should include:

  • A summary of your business
  • Company description
  • Market and competitor analysis
  • Business structure
  • Marketing and sales plan
  • Business budget

If you want to find out more, read our guide on how to write a business plan and budget.

Register with HMRC

When you start your side business, you need to register with HMRC to pay your taxes. It’s your choice whether you want to be a self employed sole trader, or start a limited company. Both have different benefits, so it’s up to you to choose what will be the best fit.

Here’s a run down of the differences between a sole trader and a limited company:

What is a sole trader?

  • A sole trader is a person who runs their own business
  • You keep the profits from their business after you have paid tax on them
  • You are responsible for the business finances, including any losses
  • You are personally responsible for your business's liabilities.

Read more about becoming a sole trader

What is a limited company?

  • A limited company is its own entity
  • It is separate from its owners and with separate finances
  • The owners are only liable for debts up to their own investment value in the company
  • Has shares and shareholders
  • Profits stay in the business after tax

Read more about starting a limited company

Paying your income tax

Once you start your business and register with HMRC, you’ll need to pay income tax. Income tax comes from your total earnings of both income from your employer and your side business. So, you’ll pay tax on the total of your earnings above your Personal Allowance.

Your Personal Allowance is £12,500. The Personal Allowance goes down by £1 for every £2 of income above the £100,000 limit.

Here’s an example:

Employment: £29,000
Side business: £12,000
Total income: £41,000
Personal allowance: £12,500
Taxable income: £28,500

You should also check if your total income puts you over into a new tax bracket. Here are the tax brackets for 2020/20201

Band and income Tax rate
Basic rate (£12,501 to £50,000) 20%
Higher rate (£50,001 to £150,000 40%
Additional rate over £150,000 45%

Find out more about the different kinds of tax you might need to pay for your business in our complete guide to UK taxes and rates.

Paying your National Insurance

You may also need to pay self employed National Insurance contributions. You will also continue to pay National Insurance contributions from your employed income.

You only need to pay Class 2 National Insurance if your self employed income is over £6,475. This will increase to Class 4 if you earn between £9,500 and £50,000.

What about your Self Assessment tax return?

You need to declare all your income and expenses on your Self Assessment tax return, including your pay from your employer.

Self Assessment tax returns are due annually, and you fill it in after the end of the tax year (5 April).

Find out more about how to do a Self Assessment tax return here.

Balancing your time

Running a side business can be really rewarding. You get to make your passion your job, or bring your big idea to life. But, making sure you have balance is key to succeeding in your employment, and in your business. Make sure you have enough time to dedicate to both, set clear hours for when you work on your business and make sure to take time to enjoy life outside of work too!

Choose the right accounting software

Managing your small business accounts for the first time can seem complicated, but choosing the right software can help make it easy.

Bokio’s free bookkeeping, invoicing and expenses software has everything you need to manage your business finances in one place. We have everything you need to help you prepare for your Self Assessment tax return, and keep the right financial records. If you need an extra hand, we can help you find an accountant to work with.

Accounting is kept simple with Bokio, so you have more time to spend managing your business.