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.
Choosing the right structure from the beginning helps avoid costly mistakes later.
How much tax you pay
Your legal responsibilities
How much paperwork you have to complete
Your ability to raise funding
Your personal financial liability
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% tax on part of your earnings.
Profits are split between partners and taxed as personal income. Like being a sole trader, higher earnings could mean paying 40% or even 45% tax.
Profits inside a limited company are taxed at the corporation tax rate of 19%. This is much lower than the 40% 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.
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% or even 45%.
A limited company allows you to pay corporation tax at 19%, 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.
Easy to set up and manage whilst you validate your business idea.
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.
Book a free consultationChoosing 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.
Taxwise Accountancy can help you set up your business correctly from day one. Get personalised advice tailored to your specific situation.