Tax whilst starting a business in full time employment

Question

I live in the UK and I'm thinking of starting a business whilst in full time employment.

I've looked up the tax rules but I'm still quite unsure on everything. I was hoping someone could just clear up any misunderstandings I have.

I have two main questions:

1. If I start a business and I pay myself a salary from that business, does the tax amount get calculated based on my current salary as well? So if I currently get taxed 40% will everything I earn from the new business immediatly get taxed at 40% because of my current job?

2. If instead of paying myself a salary I pay myself in dividends, how much would that be taxed and will it be affected by my current jobs tax?

3. If the source of my income is from building my own software (not selling it, using it to generate ad revenue or paid services to users) would IR35 ever come into play?

Regards,

Answer 1

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.