Starting a side hustle is an exciting way to boost your income. Choosing the right business structure is important for your long term success and your tax bill. Whether you become a sole trader, form a partnership, or set up a limited company can make a big difference financially.
In this guide, we explain the advantages and disadvantages of each option, with a special focus on the tax impact for UK taxpayers.
Why Your Business Structure Matters
Your business structure affects:
- How much tax you pay
- Your legal responsibilities
- How much paperwork you have to complete
- Your ability to raise funding
- Your personal financial liability
Choosing the right structure from the beginning helps avoid costly mistakes later.
Option 1: Becoming a Sole Trader (Self-Employed)
Advantages:
- Easy and inexpensive to set up
- Simple tax filing through Self Assessment
- Full control of your business
Disadvantages:
- You are personally responsible for all debts
- Higher income could push you into higher tax bands
- Limited options for growing your business
Tax impact:
As a sole trader, profits are taxed as personal income. If your side hustle pushes you over the £50,270 higher rate threshold, you could pay 40 percent tax on part of your earnings.
Option 2: Forming a Partnership
Advantages:
- Shared responsibility with business partners
- Simple to set up
- Easier to raise funds than as a sole trader
Disadvantages:
- Joint liability for debts
- Potential for disputes between partners
Tax impact:
Profits are split between partners and taxed as personal income. Like being a sole trader, higher earnings could mean paying 40 percent or even 45 percent tax.
Option 3: Setting Up a Limited Company
Advantages:
- Limited personal liability
- Greater tax efficiency
- Professional image boosts credibility
- Easier to raise investment
Disadvantages:
- More complex and costly to set up
- Ongoing reporting and compliance requirements
- Potential for double taxation through corporation tax and dividend tax
Tax impact:
Profits inside a limited company are taxed at the corporation tax rate of 19 percent. This is much lower than the 40 percent personal tax rate you would pay as an individual earning over £50,270.
You can pay yourself through a small salary and dividends, which can be far more tax efficient in the long run.
Which Structure is Best
The best structure depends on your personal situation.
If you already earn over £50,000 from employment, setting up a limited company for your side hustle is usually more tax efficient. Otherwise, your side income would stack on top of your salary and be taxed at 40 percent or even 45 percent.
A limited company allows you to pay corporation tax at 19 percent, keeping more profit in the business.
However, if your side hustle is small and you want to test the waters first, starting as a sole trader is simpler and less costly initially.
Important:
There is no one size fits all answer. It is wise to think long term, plan ahead and consult a professional accountant to tailor the right strategy for your goals.
Final Thoughts: Plan for Success
Choosing the right business structure at the start of your side hustle journey will save you headaches and money in the future. Always think about where you want your business to be in two, five, or ten years.
Whether you decide on sole trader, partnership or limited company, make sure your structure supports both your short term needs and your long term ambitions.
Need expert advice? Taxwise Accountancy can help you set up your business correctly from day one. Contact us today for a free consultation.
