Starting a Side Hustle Limited Company While Employed

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Last updated 23 October 2026. Written by the Limited Company Accountant UK team, part of Accotax. Figures are for the 2026/27 tax year; always check GOV.UK for the latest rates.

Short answer: Yes, you can usually set up and run a limited company while in employment, provided your contract does not forbid it and you avoid conflicts of interest. Your employer taxes your job through PAYE, while the company pays Corporation Tax on its own profit. Whether a company beats trading as a sole trader depends on how much profit you make and whether you need the money personally.

Key facts

Allowed?	Usually, check your contract
Job income	Taxed via PAYE as normal
Company profit	Corporation Tax 19%–25%
Taking money out	Salary or dividends
Small side income	Trading allowance £1,000 may suffice

Can you start a company while employed?

In most cases, yes. There is no law that stops an employee from becoming a company director or shareholder. The restrictions come from your employment contract, which may include clauses about outside work, exclusivity, confidentiality or working for competitors. Read it carefully and check the staff handbook. Many employers are relaxed about unrelated side businesses, particularly if you are open about them. If your idea overlaps with your employer’s business or uses their time, equipment or client lists, you could breach your contract or your duties of loyalty, so get permission in writing where there is any doubt.

Check your contract and conflicts of interest

Three things matter most. First, exclusivity clauses, which may require written consent for any other work. Second, restrictive covenants, which limit working for competitors or approaching clients. Third, intellectual property clauses, which may give your employer ownership of ideas created in work time or using their resources. Keep your side business entirely separate: use your own devices, work outside paid hours and avoid employer contacts. If your role involves regulated activity, such as finance or healthcare, there may also be professional rules about disclosure. A short, honest conversation with your manager is often the safest route.

Do you need a company at all?

Many side hustles are better off as sole trader businesses at first. If your trading income is under £1,000 in a tax year, the trading allowance may mean you owe nothing and need not even report it. Above that, you register for Self Assessment and pay Income Tax and Class 4 National Insurance on profit. A limited company becomes attractive when profits are meaningful, when you want limited liability, when you need a professional image, or when you want to keep profits in the business. It adds accounts, filings and costs, so it should earn its place.

How tax works alongside your job

Your salary is taxed through PAYE and uses up your personal allowance and basic-rate band first. If you run the side business as a sole trader, its profit stacks on top, so it may be taxed at 20% or 40%. With a company, profit is taxed first at Corporation Tax, from 19% up to 25% depending on profit, and anything you take out personally is taxed again as salary or dividends. Because your job already uses your allowances, dividends from the company are often taxed at 10.75% or 35.75% from the first pound, so retaining profit in the company can be useful.

Salary or dividends from your side company

If you already earn above the National Insurance thresholds in your job, paying yourself a salary from the company usually adds little benefit and may create extra payroll duties. Many employed directors take no salary and use dividends instead, paid only from available post-tax profit. A tiny salary can still help in some cases, for example to keep a qualifying year for the State Pension, but you should check this with your accountant. Dividends must be properly declared with minutes and vouchers, and you must not pay them unless the company has enough distributable profit.

Registering the company and your tax duties

Set up the company with Companies House, choose a name, appoint yourself as director and register for Corporation Tax within three months of starting to trade. Complete identity verification, open a business bank account and keep company money separate from your own. You will file annual accounts, a Corporation Tax return and a confirmation statement, and report dividends on your personal Self Assessment return. If the company will employ you, you also need PAYE. Missing any of these brings penalties, so diarise the dates from the start.

VAT, pricing and invoicing

You must register for VAT if the company’s taxable turnover exceeds the threshold, currently £90,000 over a rolling twelve months. Below that, registration is voluntary and rarely worthwhile for B2C side businesses, but can help if you sell to VAT-registered customers and have significant costs. Invoices should show the company name, number, address, date and a clear description. Agree payment terms upfront and chase late payers early. Keeping invoicing tidy from the first sale makes accounts and tax return preparation much quicker.

Expenses, equipment and working from home

The company can claim expenses incurred wholly and exclusively for its trade, including software, marketing, insurance, professional fees and equipment. Equipment may qualify for the annual investment allowance. If you work from home on the side business, you can claim a reasonable portion of household costs or the simplified flat rate, but only for the business element. Do not claim costs that your employer already reimburses, and keep receipts for everything. Personal spending from the company account must be recorded as a director’s loan.

Pensions, mortgages and wider planning

Employer pension contributions from the company can be tax-efficient, but you should coordinate them with your workplace pension and annual allowance. Mortgage lenders may look at your employment income and company profits together, and newly formed companies often have limited trading history, so consider timing if you plan to move home. Insurance, such as professional indemnity or public liability, protects the company if clients make claims. Review your plans each year as the side hustle grows.

When to move from side hustle to full-time

Growing profit, a client base that can replace your salary and a few months of savings are the usual signs it is time to consider going full-time. At that point, review salary and dividend planning, VAT registration, pension arrangements and whether to hire help. Giving proper notice and reading any restrictive covenants will protect you from disputes with your former employer. A short planning session with an accountant can model the transition and highlight tax costs before you commit.

A realistic example

Imagine an employee earning £42,000 who starts a design side hustle making £15,000 profit. As a sole trader, the profit is added to salary and taxed at 20% plus Class 4 National Insurance. Through a company, the profit is taxed at Corporation Tax first, and the owner can leave money in the business until needed. If the money is spent personally, dividends are taxed on top, so the saving is mostly a timing benefit unless the profit is reinvested. This is why small side incomes often stay as sole trader, while larger or growing ones move into a company.

Frequently asked questions

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