Side business - tax query

[JLammy]

I'm currently looking at setting up and running a small side hustle, which will be in addition to my full-time PAYE job.

Given that I'm already in the higher rate tax bracket, will the side business essentially need to take this into account, and need higher profit margins in order for it to be worthwhile, as anything extra that I take home will be taxed at the higher rate - is this how it works, or have I completely got this wrong?

Smart thing would probably be speaking to an accountant, but wanted to know more on the subject before engaging one...

Any help or advice would be appreciated!

[PushedDover]

will you have high start up costs you can offset ?

[Eric Mc]

JLammy said:

I'm currently looking at setting up and running a small side hustle, which will be in addition to my full-time PAYE job.

Given that I'm already in the higher rate tax bracket, will the side business essentially need to take this into account, and need higher profit margins in order for it to be worthwhile, as anything extra that I take home will be taxed at the higher rate - is this how it works, or have I completely got this wrong?

Smart thing would probably be speaking to an accountant, but wanted to know more on the subject before engaging one...

Any help or advice would be appreciated!

As you are already a higher rate taxpayer, if your business generates taxable profits, then those profits will be taxed at your higher tax rate. You may also be liable to Class 2 and Class 4 National Insurance (as a sole trader).

[JLammy]

PushedDover said:

will you have high start up costs you can offset ?

Unfortunately not, but that is because I already own the machinery (CNC and a few 3D printers) as a hobby, so it's likely only going to be material costs.

Eric Mc said:

As you are already a higher rate taxpayer, if your business generates taxable profits, then those profits will be taxed at your higher tax rate. You may also be liable to Class 2 and Class 4 National Insurance (as a sole trader).

Thanks Eric - this will make the business case a tad more challenging then, so I'll have to go back to the drawing board and determine how I can make the margins good enough to absorb this. Would really hate to be working late into evenings and weekends, for very little extra.

[zedx19]

I have a 9-5 in the 40% bracket, my wife doesn't work so she has a sideline which makes full use of her tax free allowance.

[Eric Mc]

JLammy said:

PushedDover said:

will you have high start up costs you can offset ?

Unfortunately not, but that is because I already own the machinery (CNC and a few 3D printers) as a hobby, so it's likely only going to be material costs.

Eric Mc said:

As you are already a higher rate taxpayer, if your business generates taxable profits, then those profits will be taxed at your higher tax rate. You may also be liable to Class 2 and Class 4 National Insurance (as a sole trader).

Thanks Eric - this will make the business case a tad more challenging then, so I'll have to go back to the drawing board and determine how I can make the margins good enough to absorb this. Would really hate to be working late into evenings and weekends, for very little extra.

When you bought the machinery, did you make any Capital Allowance claims at the time?
How long ago did you buy the equipment?

[PurpleFox]

If you personally do not need the extra money the company generates would it not be better set up your side business as a Ltd company?

That way any profits you make will be due for corporation tax (currently 19%). You can then choose to use the rest in a tax efficient way such as make contributions to your pension, take a dividend, re-invest it or just keep the money and draw it down later when it might be more tax efficient...?

[Eric Mc]

PurpleFox said:

If you personally do not need the extra money the company generates would it not be better set up your side business as a Ltd company?

That way any profits you make will be due for corporation tax (currently 19%). You can then choose to use the rest in a tax efficient way such as make contributions to your pension, take a dividend, re-invest it or just keep the money and draw it down later when it might be more tax efficient...?

If he keeps the activity as a sole trader and shows a taxable loss in his first period of trading, he might be able to reclaim some PAYE he has already suffered. That's why I was asking about the Capital Allowance situation.

[StevieBee]

I would advise that you check the employment contract of your day-job. I know some to include clauses that forbid or limit the pursuit of commercial activity outside of work regardless of the relevance to the business that employs you. I've never been certain on how enforceable such clauses are but should you be unfortunate enough to have one, it would be worth you at least knowing.

[JLammy]

Eric Mc said:

When you bought the machinery, did you make any Capital Allowance claims at the time?
How long ago did you buy the equipment?

Nope, no Capital Allowance claims were made, as I genuinely bought the CNC machine and 3D printers to play with, and hadn't thought about trying to earn additional income with it. I bought them over a year ago now (September 2021), so may have missed the boat in terms of claiming in year?

StevieBee said:

I would advise that you check the employment contract of your day-job. I know some to include clauses that forbid or limit the pursuit of commercial activity outside of work regardless of the relevance to the business that employs you. I've never been certain on how enforceable such clauses are but should you be unfortunate enough to have one, it would be worth you at least knowing.

Good shout. Will check this, but I don't recall it being an issue when I last read my contract 8 years ago! (at least I hope not)

[Eric Mc]

JLammy said:

Eric Mc said:

When you bought the machinery, did you make any Capital Allowance claims at the time?
How long ago did you buy the equipment?

Nope, no Capital Allowance claims were made, as I genuinely bought the CNC machine and 3D printers to play with, and hadn't thought about trying to earn additional income with it. I bought them over a year ago now (September 2021), so may have missed the boat in terms of claiming in year?

StevieBee said:

I would advise that you check the employment contract of your day-job. I know some to include clauses that forbid or limit the pursuit of commercial activity outside of work regardless of the relevance to the business that employs you. I've never been certain on how enforceable such clauses are but should you be unfortunate enough to have one, it would be worth you at least knowing.

Good shout. Will check this, but I don't recall it being an issue when I last read my contract 8 years ago! (at least I hope not)

If purchased in September 2021, then the purchase was in tax year 2021/22. The deadline for filing the 2021/22 tax return is 31 January 2023 - so time to get a submission in if necessary. I presume you have the original receipts/invoices?

Have you started to generate any income from your "sole trader" activity yet?

[JLammy]

Eric Mc said:

If purchased in September 2021, then the purchase was in tax year 2021/22. The deadline for filing the 2021/22 tax return is 31 January 2023 - so time to get a submission in if necessary. I presume you have the original receipts/invoices?

Have you started to generate any income from your "sole trader" activity yet?

Ok, in that case, great! Yep, all receipts in my email inbox.

Had a few eBay sales on some products I've designed and made in the past month, which is what triggered the desire to make this work longer term.

Is an accountant the way to go or will this really be fairly straight forward in terms of getting self assessments done etc.? But as you could probably tell, I don't usually dabble with tax etc. in my day job!

[Eric Mc]

As an accountant, I would always suggest making use of one.

What I would do in your situtaion is, forget tax year 2021/22. Set up your sole trader business as starting in tax year 2022/23 (based on the fact that your first sale was in 2022/23). "Introduce" the fixed assets your purchased in September 2021 into the business on the date the business actually commenced. As the business commenced only a few months after the assets were purchased, the asset values as shown on the purchase invoices would be perfectly acceptable.

Then, after 5 April 2023, prepare your first set of trading figures showing your income, your business costs and your Capital Allowances claims. I would reckon that this will show a loss for the first trading period (because of the Capital Allowance claim - which can be up to 130% of the cost of the assets ). A trading loss generated in a tax year can be offset against non-trading income (such as your salary) in the same tax year.
Therefore, you should be able to recover some of the PAYE you have already suffered on your 2022/23 salary.

Get an accountant.

[JLammy]

Eric Mc said:

As an accountant, I would always suggest making use of one.

What I would do in your situtaion is, forget tax year 2021/22. Set up your sole trader business as starting in tax year 2022/23 (based on the fact that your first sale was in 2022/23). "Introduce" the fixed assets your purchased in September 2021 into the business on the date the business actually commenced. As the business commenced only a few months after the assets were purchased, the asset values as shown on the purchase invoices would be perfectly acceptable.

Then, after 5 April 2023, prepare your first set of trading figures showing your income, your business costs and your Capital Allowances claims. I would reckon that this will show a loss for the first trading period (because of the Capital Allowance claim - which can be up to 130% of the cost of the assets ). A trading loss generated in a tax year can be offset against non-trading income (such as your salary) in the same tax year.
Therefore, you should be able to recover some of the PAYE you have already suffered on your 2022/23 salary.

Get an accountant.

Thanks for this Eric! This is extremely helpful - not sure if you do accounting work for small business such as this? If not, I'll have to look online for one.

Nonetheless, you've been of great help and I now have answers to all of my questions!