Setting up a side business is something that more and more people are doing. In most cases, there should be no legal restrictions preventing you from forming a limited company while employed. However, there are some factors to consider before taking the leap.
Clauses in your contract of employment
This won’t be an issue for most people, but some companies do include restrictive covenants in their employees’ contracts of employment. These types of restrictions can include:
- non-solicitation clauses – you are prohibited from soliciting (approaching and poaching) your employer’s existing staff, clients, or suppliers
- non-dealership clauses – you cannot do business with your employer’s existing clients
- non-compete agreements – you cannot set up a competing business
- confidentiality clauses – you are prohibited from revealing trade secrets and valuable business insights
Some contracts may also include restrictions that prohibit employees from having a second job or setting up their own business whilst still employed, even if the work takes place outside of the employer’s business hours.
If your contract of employment includes any such restrictions and/or you’re unsure of your position, you should seek specialist legal advice before you form a limited company.
Managing your time
Another important consideration is how you will manage your time. Setting up and running a business is demanding and can take up a lot of headspace, so you will need to create a strict routine, plan carefully, and keep everything at a steady pace.
If you try to do too much too soon, you may find that your productivity levels drop in the workplace and in your new business, which could put both roles in jeopardy.
Overdoing things could also have a knock-on effect on your personal life and family. Maintaining a healthy work-life balance is important if you want to avoid unnecessary stress or burnout, so try to take things at a steady, manageable pace.
Limited company tax implications
Extra income is always welcome, but you must report these earnings to HMRC. If you are setting up a company, you will need to register for:
- Corporation Tax – to pay tax on business profits
- Pay As You Earn (PAYE) – to pay Income Tax and Class 1 National Insurance on your director’s salary
- Self Assessment – to report all sources of income (employment, company salary, dividends) and pay tax on dividends
- VAT – to charge, pay, and reclaim VAT if your company’s VAT taxable turnover is more than £85,000
You will likely receive a second tax code from HMRC, which you will use to pay yourself your director’s salary through PAYE as part of your payroll. This code will be a different from the one used by your employer.
Depending on your total annual earnings from your employed work and your new company, you may end up paying higher (40%) and additional (45%) rates of Income Tax.
Bear this in mind when working out how to pay yourself through a limited company. You may find that it is more beneficial from a tax perspective to retain/reinvest some of the profits in the company.
If you’re seriously considering forming a limited company and starting a new business, it makes a lot of sense to do this on the side whilst retaining the security of employed work.
This is especially true if you’re unsure about the viability of your business idea and/or you rely on your income from employment to pay your bills.
Registering a company and setting up your own business can feel like a daunting prospect. It’s certainly not without risk, but fear of failure shouldn’t put you off your goal of developing a business idea and earning more money.
And who knows, your business may become so successful that you can quit your job and run your company full time!