Running a business while employed: Legal & tax considerations

Running a business while you’re still employed is a popular way to explore entrepreneurship without immediately giving up the security of a steady income. Many individuals in the UK choose to form a limited company alongside their full-time job, whether they’re testing a potential startup idea, launching a side hustle, or transforming a weekend project into something more serious.

But before you dive in, it’s important to understand the practical and legal aspects. Can your employment contract limit what you do? Will you need to tell your employer? And how do you handle UK tax rules – including PAYE, Corporation Tax, and Self Assessment – when your income is coming from two different sources?

This guide will walk you through everything you need to know: from checking contract restrictions and forming your company, to registering with HMRC, managing tax codes, and keeping your business legally compliant while you stay employed.

Can I start a business while already employed in the UK?

Yes. You can usually form a limited company when you have a job at another organisation, provided your contract does not restrict such activity.

2025 research from AnyBusiness shows 49% of Brits dream of running a business, but only 6% say “not having time outside my current job” is an obstacle. This suggests that there’s a wave of employees waiting for the right moment to set up their own business.

Doing so can be easier than you think. However, there are key considerations, such as whether it might cause an issue with your current employer, and ensuring you understand the tax implications.

Forming a limited company when you have a job

You don’t need any special or extra steps to start a business when you’re already employed. To set up a company, register it with Companies House – you can do this directly yourself or through a company formation agent, such as 1st Formations, which can also handle compliance tasks and provide useful extras, such as a registered office address.

• How much does it cost to set up a limited company?
• 5 tax benefits of a limited company

Then, register for the taxes you’ll need to pay, such as Corporation Tax and VAT, as well as Self-Assessment, which covers levies on personal earnings, including Dividend Tax.

If you plan to pay yourself a salary or take on staff, you’ll also need to set up as an employer and start a payroll system that deducts Income Tax and National Insurance Contributions (NICs) at source.

Employment contract restrictions

It’s essential to read your contract, any staff handbook, and relevant policies before starting your new enterprise. Some include clauses on:

• Secondary employment
• Conflicts of interest
• Working for competitors
• Using employer time or equipment
• Non‑compete and confidentiality terms

Breaching these clauses may result in disciplinary action and dismissal. If your new business activity causes your primary employer a financial loss, they could even seek compensation through the courts.

Yunus Lunat, partner at Ison Harrison Solicitors, says if there’s any way your new business can be seen as competition, don’t set up or start trading while you’re still with your primary employer.

If the product or service you’re planning to provide is completely different – say, if you work as a surveyor but want to earn money selling pottery – you’re on safer ground. But it’s still advisable to discuss the move with your employer.

“The biggest mistake I’ve come across recently is someone jumping the gun and starting a company before they’ve checked whether they’re breaching their obligations to their employer,” says Lunat. “Once you’ve formed a company, your name is listed as a director at Companies House. Your employer can find it easily.”

Do you need to tell your employer?

There is no general law compelling you to advise your employer that you’re starting a business. However, many organisations – especially those in the public sector and regulated industries such as finance – require you to declare second jobs and external directorships and get written consent. You must follow these processes to avoid legal action.

Even where your employer does not specifically require it, disclosure is often wise if there’s any chance they could see it as a conflict of interest or impacting your energy and availability. Lunat says:

Even if there are no restrictive clauses, senior employees such as directors have a fiduciary duty to devote their full-time attention to their role. So they may have issues if they try to set up another company.

And every employee has a duty not to use their employer’s knowledge, processes, or any data on their system – such as customer or supplier details – elsewhere. You also have a duty not to devote so much time that it impacts your performance in the primary role.

Don’t think “it doesn’t matter, I’m planning to leave soon.” Companies often look at departing employees’ computers and laptops, so they’ll know if you’ve transferred anything outside the company, adds Lunat.

How does tax work if you run a business while employed elsewhere?

Your salary from your primary job is taxed under the PAYE (Pay As You Earn) system, with your employer deducting Income Tax and employee NICs at source.

In a limited company, you’ll be much more involved in paying taxes. You may need to pay:

• Corporation Tax on business profits
• Income Tax and NICs on staff pay and on your director’s salary
• VAT, if your qualifying income is over the threshold of £90,000
• Business Rates if you have qualifying business premises

If you only pay yourself salary taxed at source, you may not need to fill out a Self Assessment form, but check if HMRC’s criteria for this apply to you. If the company pays you dividends, you must report this income on your personal tax return and pay any Dividend Tax due directly.

Separate tax codes for your income streams

If you pay yourself a director’s salary, you’re both an employee of your company and its owner, and you need to tell HMRC you have more than one job.

Your Personal Allowance (£12,570 in 2026/27) is the amount up to which you pay no Income Tax. You only get one PA across all your earnings. However, the PAYE system will typically apply the PA only to your primary job and reflect this in a tax code like 1257L.

To ensure tax is paid correctly on your director’s salary, HMRC will issue a separate code for that income stream, such as BR for basic rate Income Tax, D0 for higher rate, and D1 for additional rate in England. Tax codes are different in Scotland and Wales. Use this code in your new company’s payroll.

You can ask HMRC to allocate your PA to a different job or split it between two income sources if neither is above £12,570.

Self Assessment and tax returns explained

You must enter all sources of personal income on your Self Assessment form.

• Include any primary employment income taxed at source, plus salary or dividends you’ve paid yourself from your company.
• Do not include your company’s profits, for which you pay Corporation Tax and report separately.

HMRC will calculate the personal tax you still owe after deductions at source.

Case study: Paying tax through employment and a business

Here’s an example provided by Gemma Hing, Director at Carroll Accountants.

Sarah lives in England. She is employed part-time as a bookkeeper and also runs a jewellery business. During 2026/27, she earns £15,000 from her job and pays £486 in PAYE tax. She also earns profits of £5,000 from her company, on which she pays CT of £950, and then distributes the balance of £4,050 to herself in dividends only.

When Sarah completes her Self Assessment return, she will include her dividends, as well as all her employment income and tax deducted through PAYE. She will report her company profits separately. Her tax calculation will look like this:

• Employment income: £15,000
• Dividends: £4,050
• Total income received: £19,050
• Minus Personal Allowance: -£12,570
• Income Tax deducted via PAYE: £486
• Dividend Tax: £381.63

The tax due on Sarah’s dividends, payable by 31 January 2028, is £381.63

The company’s CT of £950 is due nine months and one day after the end of its accounting year. If the year ends on 30 April 2027, this would be 1 February 2028.

Common mistakes and how to avoid them

Typical mistakes when running a business alongside employment are:

• Missing deadlines such as for filing company accounts, and for registering, filing or paying Self Assessment, CT or VAT
• Not setting up as an employer and starting PAYE before your first payroll
• Not declaring second income properly
• Not setting aside enough money to pay VAT, Corporation Tax, and Dividend Tax when they’re due

All these mistakes can lead to penalties and interest. To avoid them:

• Keep a list of all your income sources, showing whether and when you need to declare them
• Register as soon as you know you have untaxed income
• Keep comprehensive financial records during the year
• Set reminders so you can file and pay on time
• Forecast how much tax you’ll owe early
• Regularly set aside money in a separate account, so you have enough to pay on the due dates

1st Formations’ All Inclusive package includes registration for PAYE and VAT to help ease your set up administration.

Checklist: Starting a business when you’re employed

1. To create a limited company, register it with Companies House and HMRC, and be ready to file company accounts.​
2. Submit your Corporation Tax return and pay on time.
3. If you’re paying yourself dividends, register for Self Assessment, keep records, and file your return and pay on time.
4. Include all income sources (including those from jobs, rentals, dividends, and interest) on your personal tax return so that HMRC can assign a correct tax code and band.​
5. Take advice if you’re unsure about your business structure, expect fast growth, or feel uncomfortable handling legal and tax details. Company registration specialists, such as 1st Formations, make the early stage of registration easier, faster, and less error-prone – and they provide valuable post-formation support.

Preparing for a new adventure

Forming a separate UK business while you’re employed could be the start of an exciting new chapter in your life.

Before taking this step, carefully check that it won’t create any issues with your current employer. Ensure you’re on top of registrations, deadlines, and tax codes to avoid penalties and interest once the business is up and running.

Ready to launch your dream company? Get started with 1st Formations.