Business Status for Part-time Business

Hi Jarv

If you're looking to minimise the administrative burden then I'd say you're better off starting up as a partnership rather than as a limited company. As a partnership you can more or less start to trade straight away. All you have to do is ensure that you inform the Inland Revenue of your self employment within three months of starting to trade, otherwise you both face a £100 fine.

They’ll inform you that you each have to start paying Class 2 National Insurance, £2.10 per week for 2005/06, for which you can set up a direct debit. If you expect your earnings from self employment to be below £4,345 for the coming tax year you can you can apply for an exception from this. Tell them this when you register and they’ll send you a form

Paying Class 1 National Insurance via your employment will not exempt you from paying Class 2 National Insurance.

Any profits that you make from self employment will be added to your employment earnings and taxed at whatever rate your employment is being taxed at. If your share of the profits pushes your taxable income over £32,400 then a proportion of your profits will be taxed at the higher rate of 40%. If your business is loss making then these losses can be offset against your employment income and reduce your tax bill accordingly.

At the end of the tax year the Inland Revenue will send you a tax return. You’ll need to complete it giving details of your employed and self employed earnings as well as any other taxable income you might have. Provided you submit your return before their September end deadline they’ll calculate the tax and any Class 4 NI that you might owe.

You can see therefore that it is essential that you keep good records of your income and expenditure to substantiate your tax return. This shouldn’t be too difficult. As long as you keep on top of it, it shouldn't take you more than an hour a week. Alternatively if you can't be doing with the bookkeeping you can always farm it out to a good bookkeeper like me (she says - plugging furiously).

If later down the line you decide you want to incorporate you can always do so but at this stage I wouldn't have thought it worth the hassle.

Regards

Joy

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Joy & Co
Chartered Certified Accountants
www.joyandco.co.uk

Many thanks Joy, your response is of great help.

Regarding the following:

"Any profits that you make from self employment will be added to your employment earnings and taxed at whatever rate your employment is being taxed at."

Does this mean that we are taxed seperately but at whatever rate we qualify for? I suppose what I am trying to say is does it actually affect your wages unless you jump up to a higher tax bracket?

Kind Regards

Jarv

Jarv,

You asked, "does it actually affect your wages unless you jump up to a higher tax bracket?"

There will be no impact on your wages of these earnings whether you are a higher rate tax payer or not. Self employed income is administered quite separately to PAYE and wont generally affect your employers tax computations.

What you do is fill in a tax return and pay your taxes due directly to the IR for your self employment and your employer will deal with your earnings as they do now.

I quite agree with Joy's assessment that you should wait until things go well before even thinking about starting a limited company as this is only a part time operation.

If you need some basic bookkeeping templates then let me know and I will send you something suitable.

Regards,

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James Smith
Chartered Accountant
www.jamesesmith.co.uk
01235 536 773

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Your indispensable guide to Small Business Bookkeeping, Self-Assessment & VAT