Tax whilst starting a business in full time employment
With a limited company, you'll have to pay yourself a salary through PAYE. With income from your other job taking you over the higher-rate threshold, you should inform HMRC of this and get a tax code of DO for the second job, meaning 40% tax (and also both employer's and employee's National Insurance) will be deducted from the whole amount of the salary. See here.  Dividends should be like any other dividend -- you won't pay extra tax when you receive them, but will have to declare them on your tax return and pay the tax later. See the official information here. You'll get a £5,000 tax allowance for dividends, but they'll still count as income for purposes of hitting the higher-rate threshold. I think in practice this means the first £5,000 will be tax-free, and the rest will be taxed at 32.5%. But note that you have to pay yourself at least the minimum wage as salary, not as dividend.  I can't see IR35 being an issue.  However, I'm not a professional, and this situation is complicated enough to need professional advice. Talk to an accountant or a tax advisor.
PSB taxed at higher rates. PSB is taxed at 39.5% in Ontario, as the article mentioned. But if you pay all the net income to yourself as salary, you expense it and zero it out on the corporate level. So who cares what tax rate it is if the taxable income is zero? No-one. Same goes for the US, by the way. Personal Service Corporations are taxed at flat 35% Federal tax rate. But if you pour all the income into your salary - its moot, because there's no net income to pay tax of. If it's too complicated to figure out, maybe it would be wise to hire a tax accountant to provide counsel to you before you make decisions about your business. If this will be your sole income for the year, going self-employed is the best way to do this: So, here's how to go at it: Total cash in: £2000 Total Tax paid: £0 Admin overhead: approx 3 hours. Legit: 100%   :) Edit:  Can you tell me that in my case what are the required fields on the invoice? If you're non-VAT registered, there are no legal requirements as to what information you need to put on the invoice -it literally can be a couple of numbers on a napkin, and still be legit.  With that said, to make a professional appearance, my invoices are usually structured as follows: Left side: ( Sidenote: why client-specific incremental numbering? Why, so they can't make educated guesses to the number of clients I have at any given time :)  ) Right side: Center table: And so far, none of my clients missed any fields, so this should have everything they need to :) Hope this helps, but keep in mind, all of the above is synthetic sugar on the top -ultimately,  the relationship you share with your Clients is the thing you will (or will not) get paid for! Edit#2: The voices in my head just pointed out, that I've totally omitted National Insurance contributions in the above. However, and I quote HMRC: If your profits are expected to be less than £5,315 you may not have to pay Class 2 National Insurance contributions. Hence, this won't change the numbers above, either -just make sure to point this out during your registration in the office. In some circumstances losses from self-employment can be offset against total income and/or capital gains. If this applies to you may be able to claim back some of the tax taken by PAYE from your day job.  You can also to some extent carry the loss backwards into previous tax years or forward into the next one if you can't use it fully this year. HMRC have some information available on the current rules: When you can claim losses  You can claim: But You can’t claim: Not sure about the UK, but if it were in the US you need to realize the expenses can be claimed as much as the income. After having a mild heart attack when I did my business taxes the first time many years ago, a Small Business Administration adviser pointed it out. You are running the site from a computer?  Deductible on an amortization schedule.  Do you work from home?  Electricity can be deducted.  Do you drive at all?  Did you pay yourself a wage?  Any paperwork, fax communications, bank fees that you had to endure as work expenses? I am not an accountant, but chances are you legally lost quite a bit more than you made in a new web venture.  Discuss it with an accountant for the details and more importantly the laws in your country.  I could be off my rocker. As 'anonymous' already mentioned, I think the correct answer is to go see an accountant. That said, if you are already have to fill in a tax return anyway (ie, you're already a high rate taxpayer) then I don't see why it should be an issue if you just told HMRC of your additional profit via your tax return. I never was in the situation of being employed with a side business in the UK, only either/or, but my understanding is that registering as self employed is probably more suitable for someone who doesn't PAYE already. I might be wrong on this as I haven't lived in the UK for a couple of years but an accountant would know the answer. Of course in either case, make sure that you keep each an every scrap of paper to do with your side business. "A tax return is a document you sign and file with the government to self-report your tax obligations. A tax refund is the payment you receive from the government if your payments into the tax system exceeded your obligations.  As others have mentioned, if an extra $2K in income generated $5K in taxes, chances are your return was prepared incorrectly. The selection of an appropriate entity type for your business depends a lot on what you expect to see over the next several years in terms of income and expenses, and the extent to which you want or need to pay for fringe benefits or make pretax retirement contributions from your business income. There are four basic flavors of entity which are available to you: Sole proprietorship. This is the simplest option in terms of tax reporting and paperwork required for ongoing operations. Your net (gross minus expenses) income is added to your wage income and you'll pay tax on the total. If your wage income is less than approximately $100K, you'll also owe self-employment tax of approximately 15% in addition to income tax on your business income. If your business runs at a loss, you can deduct the loss from your other income in calculating your taxable income, though you won't be able to run at a loss indefinitely. You are liable for all of the debts and obligations of the business to the extent of all of your personal assets. Partnership. You will need at least two participants (humans or entities) to form a partnership. Individual items of income and expense are identified on a partnership tax return, and each partner's proportionate share is then reported on the individual partners' tax returns. General partners (who actively participate in the business) also must pay self-employment tax on their earnings below approximately $100K. Each general partner is responsible for all of the debts and obligations of the business to the extent of their personal assets. A general partnership can be created informally or with an oral agreement although that's not a good idea. Corporation. Business entities can be taxed as ""S"" or ""C"" corporations. Either way, the corporation is created by filing articles of incorporation with a state government (doesn't have to be the state where you live) and corporations are typically required to file yearly entity statements with the state where they were formed as well as all states where they do business. Shareholders are only liable for the debts and obligations of the corporation to the extent of their investment in the corporation. An ""S"" corporation files an information-only return similar to a partnership which reports items of income and expense, but those items are actually taken into account on the individual tax returns of the shareholders. If an ""S"" corporation runs at a loss, the losses are deductible against the shareholders' other income.  A ""C"" corporation files a tax return more similar to an individual's. A C corporation calculates and pays its own tax at the corporate level. Payments from the C corporation to individuals are typically taxable as wages (from a tax point of view, it's the same as having a second job) or as dividends, depending on how and why the payments are made. (If they're in exchange for effort and work, they're probably wages - if they're payments of business profits to the business owners, they're probably dividends.) If a C corporation runs at a loss, the loss is not deductible against the shareholders' other income.  Fringe benefits such as health insurance for business owners are not deductible as business expenses on the business returns for S corps, partnerships, or sole proprietorships. C corporations can deduct expenses for providing fringe benefits.  LLCs don't have a predefined tax treatment - the members or managers of the LLC choose, when the LLC is formed, if they would like to be taxed as a partnership, an S corporation, or as a C corporation. If an LLC is owned by a single person, it can be considered a ""disregarded entity"" and treated for tax purposes as a sole proprietorship. This option is not available if the LLC has multiple owners.  The asset protection provided by the use of an entity depends quite a bit on the source of the claim. If a creditor/plaintiff has a claim based on a contract signed on behalf of the entity, then they likely will not be able to ""pierce the veil"" and collect the entity's debts from the individual owners. On the other hand, if a creditor/plaintiff has a claim based on negligence or another tort-like action (such as sexual harassment), then it's very likely that the individual(s) involved will also be sued as individuals, which takes away a lot of the effectiveness of the purported asset protection. The entity-based asset protection is also often unavailable even for contract claims because sophisticated creditors (like banks and landlords) will often insist the the business owners sign a personal guarantee putting their own assets at risk in the event that the business fails to honor its obligations.  There's no particular type of entity which will allow you to entirely avoid tax. Most tax planning revolves around characterizing income and expense items in the most favorable ways possible, or around controlling the timing of the appearance of those items on the tax return." In Australia, any income you earn is taxable despite where it came from. Using your example your taxable income is $70,000. Keep in mind that with a business even as a sole trader any business expenses that contribute to the earning of your business income is deductible, reducing the final amount of tax you'll have to pay.  The ATO website has lots of good information and examples to look at including tax rates.  If your total income is pushing  into a higher tax bracket over 30c tax per $1 earned, it may be worth looking at shifting your business to operate under a company structure that just has a fixed tax rate around 30c per $1.  That said, for me, I don't want the paperwork overhead of a company yet so I'm running my side business as a sole trader too. I'd rather do that and keep it easy for now while my business gets profitable that waste time on admin structures for tax reasons even if in the shortterm it may mean slightly higher tax. In the end, you only pay tax on profit (income minus expenses) as opposed to raw/gross income.  For more info there are good books in the bookshops or local library (to read free) on starting a business on the side while still working. They discuss these issues too. Yes. You must register for GST as well, if you will be making over the threshold (currently $60,000). That's probably a bonus for you, as your home office expenses will mostly include GST, but your income will most likely be zero-rated. Check with an accountant or with the IRD directly. Just be certain to put aside enough money from each payment to cover income tax, GST and ACC. You will get a very large bill in your second year of business. It is a great advice.  I would suggest going to the Companies House (it's in London somewhere), picking up all of their leaflets regarding requirements for different forms of corporate entity, and deciding if you want to have that burden.  It is not a lot of work, you can essentially claim VAT on all business purchases (the way roughly it works, is that your company invoices your client, your client has to pay the fee + VAT (usually that VAT is then deducted by your client from it's VAT, so no loss there), and you pay the VAT on the difference between the service sales price, and your costs (computers etc.) ) You have to be careful to avoid excessive double taxation (paying income tax on both corporate income, and then your personal income off said company), but it usually comes off in your favor. Essentially, if you're making more than 50% of your income from services rendered, it is to your advantage to render such services as a business entity. If this is a business expense - then this is what is called reimbursement. Reimbursement is usually not considered as income since it is money paid back to you for an expense you covered for your employer with your after-tax money. However, for reimbursement to be considered properly executed, from income tax stand point, there are some requirements. I'm not familiar with the UK income tax law specifics, but I reason the requirements would not differ much from places I'm familiar with: before an expense is reimbursed to you, you should usually do this:  Show that the expense is a valid business expense for the employer benefit and by the employer's request. Submit the receipt for reimbursement and follow the employer's procedure on its approval. When income tax agent looks at your data, he actually will ask about the £1500 tab. You and you'll employer will have to do some explaining about the business activity that caused it. If the revenue agent is not satisfied, the £750 that is paid to you will be declared as your income. If the required procedures for proper reimbursement were not followed - the £750 may be declared as your income regardless of the business need. Have your employer verify it with his tax accountant. "I don't know what you mean by ""claim for taxes,"" I think you mean pay taxes.   I'm not sure how corps function in Canada but in the US single owner limited liability entities typically pass the net income through to the owner to be included in their personal tax return.   So it seems all of this is more or less moot, because really you should probably already be including your income sourced from this project on your personal taxes and that's not really likely to change if you formed something more formal.  The formal business arrangements really exist to limit the liability of the business spilling over in to the owner's assets.  Or trouble in the owner's life spilling over to interrupt the business operation.  I don't know what kind of business this is, but it may make sense to set up one of the limited liability arrangements to ensure that business liability doesn't automatically mean personal liability. A sole proprietorship or in the US we have DBA (doing business as) paperwork will get you a separate tax id number, which may be beneficial if you ever have to provide a tax ID and don't want to use your individual ID; but this won't limit your liability the way incorporating does." There are quite a few questions as to how you are recording your income and expenses.   If you are running the bakery as a Sole Proprietor, with all the income and expense in a business account; then things are easy. You just have to pay tax on the profit [as per the standard tax bracket].   If you running it as individual, you are still only liable to pay tax on profit and not turnover, however you need to keep a proper book of accounts showing income and expense. Get a Accountant to do this for you there are some thing your can claim as expense, some you can't. Compliance issues vary from country to country and, in the US, state to state as well.  There'll be a number of levels, though: Bear in mind that it is not that these taxes and responsibilities don't apply to sole traders or unregistered businesses, it's just that being registered signals your existence and introduces the bureaucracy to you all at once. Update: Your accountant should manage your company and consumer tax calculations and submissions on your behalf (and a good one will complete all the paperwork on time plus let you know well in advance what your liability is, as well as offer advice on reducing and restructuring these liabilities).  You're probably on your own for local taxes unless your accountant deals with these and is local to even know what they are. If you sell through an intermediate who sets up the shop for you, odds are they collect and pay the sales tax for you. My experience is with publishing books through Amazon, where they definitely handle this for you. If you can find a retailer that will handle the tax implications, that might be a good reason to use them.  It looks like Etsy uses a different model where you yourself are responsible for the sales tax, which requires you to register with your state (looks like this is the information for New York) and pay the taxes yourself on a regular basis; see this link for a simple guide. If you're doing this, you'll need to keep track of how much tax you owe from your sales each month, quarter, or year (depending on the state laws).  You can usually be a sole proprietor, which is the easiest business structure to set up; if you want to limit your legal liability, or work with a partner, you may want to look into other forms of business structure, but for most craftspeople a sole proprietorship is fine to start out with.  If you do a sole proprietorship, you can probably file the income on a 1040 Schedule C when you do your personal taxes each year. There are two totally different things: There is your limited company, and there is yourself.  Your limited company will absolutely have to pay 20% corporation tax on all its profits. The profits are the income of the limited company (you say it's £5,000 a year) minus all expenses. Usually you would pay yourself a salary, which immediately reduces your profits. And of course the payment to the accountant will reduce the profits.  If the limited company is your only source of income, the usual method is to pay yourself £10,600 salary a year, possible pay money into a pension for yourself which is tax free and reduces the company's profits, pay 20% corporation on the rest, and pay yourself a dividend twice a year. Unless you have another job where you make a lot of money, you should have paid all that money to yourself as income and paid zero corporation tax.  And may I say that if you made £5,000 a year, then there is most likely not enough going on to justify that an accountant charges you £600. You should be able to find someone doing it cheaper; I cannot imagine that he or she had to do a lot of work for this.