Becoming a legal entity & Tax rules?

Kimmie30

Hi all, I'll try to keep this as brief as I can,

My partner and I started helping out friends and family during lock down with various forms of online social media management while we were out of work, just to keep our minds occupied during the pandemic.

We recently were asked through a friend of a friend to build and manage a forum attached to their website which includes analytics and deploying various online marketing strategies. This has caused our side income (income other than our full time jobs in which we are employed on a PAYE pay structure) to sky rocket from £50 randomly as a thank you once every few months, to a consistent £700-ish a month which is due to double in November as they want us to take on a second project. 

It happened so quickly we haven't had time to even think about the legality of it nor have we had much time to sort out what type of tax we should be paying or even if we are required to register as a business. 

At the moment we are just saving 20% of our total income to pay as tax but honestly not sure what to do with regards to tax as we didn't plan on forming a small business but feel like this opportunity may not come around again... so our question is:

Does anyone know if we should:-

A) Register the business and set up a business account + corresponding tax account and pay ourselves a salary
List ourselves as sole traders and set up a corresponding tax account
C) A combination of the above
D) Something else entirely?

Also does anyone know if we are required to register the business or can we just continue as freelancers and make sure we just pay the tax on it?

It's hard to figure out which solution has us paying the least possible amount of tax.

Thanks for taking the time to read this and I hope to hear back with some clarity because Direct.gov is not helpful at all, just more confusing!

DullGreyGuy

You are going to need to do B if you are on £700 a month now as you are going to exceed the £1,000 trading allowance of revenue per annum and you haven't setup the company. 

It's better to call it a company, a sole trader and a company are both "businesses" but a company is a separate legal entity registered at Companies House. 

What you really need to do is have a conversation with an accountant who can look at your current situation and talk you through the options. Operating as a Company can reduce your tax liabilities but not always, depends on many factors. 

Things to think about beforehand... do you want to take all the money you can each month or are you happy to leave most/all of it in the company to build up over a year or three? Any plans for either of you to change your employee life? Not sure if "partner" is romantic or business, if the later then knowing your spouse's position is also useful. 

Kimmie30

This has been incredibly useful, we've both felt really overwhelmed with this new "business by chance" that has formed. We will probably look into seeing a financial advisor/accountant.

Thank you so much!

uknick

I wouldn't use a financial advisor.  They probably won't be able to help you with the mechanics of running a business.  Don't think all FA are accountants and vice versa.