How start-ups are taxed

Many people starting their own businesses like to start up part-time initially while still remaining in full time employment in order to test their idea or even to run their venture on a permanently part-time basis.


Many people starting their own businesses like to start up part-time initially while still remaining in full time employment in order to test their idea or even to run their venture on a permanently part-time basis.

Many people starting their own businesses like to start up part-time initially while still remaining in full time employment in order to test their idea or even to run their venture on a permanently part-time basis.

However, this raises the unwelcome question of how this affects your tax situation, as any income from the fledgling business is added to your regular income.

“Your tax situation will depend on whether you are trading [in the eyes of the Inland Revenue],” explains Gary Heynes, a tax director at accountant Baker Tilly. “If you have a salaried job as well as undertaking some other small activities, you may not be trading, but you should always take advice. When deciding whether you are trading you need to consider a number of factors: many transactions, regular activity, a motive to make a profit, etc. None are conclusive, but all are indicators as to whether you are trading.

“If you are trading, then you will be liable to income tax on any profit, after deducting expenses related to the business,” he continues. “This profit is then added to your other income and tax is then payable through the self-assessment tax return system. If you make a loss, you may be able to set this against other income you receive if the Revenue agrees that your business was carried on commercially.

“You may also be liable to national insurance contributions on your trading profit; a weekly amount of £2.10 per week, unless you apply for exemption because your income is below £4,345 or you pay maximum contributions on your salary, and a further amount based on your level of profit,” Heynes concludes.

“It is important to register with the HM Revenue & Customs as self-employed within three months of starting, otherwise you could be liable to a £100 penalty,” warns Jeffrey Webber, Associate Director of accountant and business adviser Chiltern.

A useful starting point, he adds, is Revenue Booklet PSE1 (Thinking of Working for Yourself ?) which you can obtain from any Revenue Tax Enquiry Office or from their website. More detailed advice can be found in their Starting Up In Business Guide. This covers record keeping, VAT and many other topics that new business owners need to be aware of.

“It would be a good idea to engage a qualified local accountant at an early stage as your business adviser,” suggests Webber. “You could ask friends or relatives for a recommendation.”

Related Topics

Tax & Vat

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