Five steps to get your side business set up for tax
In today’s economy, many people choose to supplement their full or part-time income by setting up a small business on the side.
It might be using a particular skill to complete some ‘on the side’ freelance work, or attempting to earn money from a hobby like crocheting or knitting.
For many, the ‘side hustle’ is just a way of earning some extra cash, but others treat it like a passion project that they would like to see growing to replace their full-time job.
The growth of the ‘microentrepreneur’ has led to some important changes in the tax code which make it easier and cheaper to set up and run these kinds of businesses. But some side business owners get in trouble because they do not declare the income to HMRC.
Failing to set up your business in a way that is HMRC-compliant can limit your growth prospects. HMRC are getting better at tracking missing tax income, and the likelihood of them finding tax cheats is increasing.
Fortunately, it is really easy to comply with the rules. Here are four simple steps to make sure you stay on the right side of the taxman.
Check you need to pay income tax
Money that you make on the side isn’t always subject to tax.
If, for example, you sell some of your own shoes on eBay to earn a bit of extra Christmas money, this is unlikely to be subject to income tax.
But if, for example, you buy dozens of pairs of leather shoes from China, with the intention to sell the shoes at a profit online, this would be subject to taxation.
Even if you are selling second-hand goods, HMRC will view activity as commercial if you are doing “anything in the nature of trade”. HMRC decides these matters through their nine badges of trade. Learn more about the ‘badges of trade’ in this article.
If you are considered a ‘trader’ rather than a casual seller, you only have to pay tax on this income if you make more than £1,000 before deducting expenses. This is known as microentrepreneurs relief.
Register for self-assessment
If you are just setting up a small side business, then setting up as a limited company is unlikely to be the best option for you. Registering as self-employed or a sole trader is much easier.
Self-employed people and sole traders need to register for self-assessment and Class 2 National Insurance as soon as possible after they set up the business.
If you have not registered before then you need register online on this website. There you’ll receive a Unique Taxpayer Reference number. You’ll also get a letter within 10 working days that will need to log in to your account.
Set up a bank account
When you set up a small business on the side, it makes sense to keep the side business money separate from your everyday funds.
This makes it easier to track income and expenses and is will make your life simpler at self-assessment time.
There is no need to set up a business bank account, just open another current account with your bank.
Remember that you’ll need to keep some money in your business account to pay your self-assessment tax bill when it is due.
Track income and expenses
This is the most important part of small business taxation.
You need to make sure you keep good records of income and expenses, including receipts, in case HMRC ever chooses to investigate your affairs.
You can use spreadsheets to keep track of incomings and outgoings, but this is fiddly and labour intensive. You also have to keep paper copies of all your receipts.
Many side business owners like to use accounting software such as FreeAgent to manage their books. These cloud-based accounting systems are easier to use and allow you to store electronic copies of your receipts, so you always have them to hand.
Side business owners can also get support from an accountant. This helps you avoid mistakes and can help them maximise your tax efficiency.
For more information about cloud accountancy software contact a member of our accounts team. Call: 0808 281 0303.