Everything You Need To Know About Starting A Side Hustle In 2022: Part One

• What does self-employed mean?
• What do I need to start a small business in the UK?
• Do I legally need a business bank account?

But self-employment isn’t just a useful sticking plaster – in some cases running a side hustle can turn into a long-term success story, as well as providing a uniquely satisfying sense of fulfilment. If this is something you’re considering, we look at how to get started, the legal and tax implications, and business bank accounts.

What does self-employed mean?

At a basic level, being self-employed means working for yourself, rather than drawing a salary from an employer. It seems more and more Brits are defining themselves in this way. According to a Henley Business School study, one in four UK adults have a so-called ‘side hustle’, with younger people (aged between 25 to 34) making up the biggest demographic.

It’s no great surprise that people are drawn to the idea of self-employment and starting a business at home. The Covid pandemic – with all the economic uncertainty and greater need for flexible hours to juggle homeschooling etc – pushed many to give it a go. But even in the ‘new normal’, being able to work around other aspects of day-to-day life, whether family commitments or a personal interest, is a huge attraction. And, of course, the potential to generate an additional income is another carrot.

It’s important to realise that self-employment means slightly different things to different people. It can encompass quite a few scenarios, from being the sole director of your own limited company to working as a freelancer. Freelancing means being hired by other companies on a part-time or short-term basis to provide a service. After the work is done the freelancer is paid directly and that’s usually the end of it, although sometimes freelancers continue on what’s known as a ‘retainer’ basis, and agree to work a set number of hours per week or month. Freelancers don’t receive the same benefits as full-time employees (sick pay, parental leave etc.). On the plus side, however, they’re not locked into a salary so can effectively set their own wages. It usually offers more variety too, which can be hugely gratifying.

For the purpose of this blog we’ll be looking at the most simple way to register as self-employed – setting yourself up as a ‘sole trader’. You can, of course, look into establishing a partnership or limited company instead, if those business structures suit you better. For anyone looking to test the water, however, becoming a sole trader has the advantage of being more straightforward. The flip side is that, unlike a limited company, a sole trader business is not separate from you as an individual, so you’ll be personally responsible for any losses your business makes.

What do I need to start a small business in the UK?

Starting a business in the UK only makes sense if you’ve first got a viable product or service to offer. Our guide: how to start a small business, has plenty of tips to help you decide if your business idea is strong enough, as well as whether you’re temperamentally suited to going solo. Have you, for example, considered the impact of losing employee benefits like holiday pay if you pursue it full-time, or how you’d cope without colleagues around to bounce ideas off and trade friendly banter. It's also worth thinking about how a side hustle will impact you time-wise, which is particularly relevant if you’re juggling it with full-time work for an employer.

Once you’ve got your head around all this and honed your business plan, it’s actually pretty simple to ‘go official’. First, you’ll need to register as self-employed with HMRC and complete a yearly tax return. Tax is usually deducted automatically from wages, pensions and savings, but if you’re working for yourself you’ll need to report it via a process called Self Assessment. If you continue working for a company as well as setting up a business independently, you’ll pay tax through both PAYE and Self Assessment.

How much tax you’ll pay will depend on your annual earnings and ‘allowable expenses’ (certain business-related expenses can be subtracted from your income when you’re working out your taxable profit). Note, however, that the tax-free personal allowance and the tax bands are the same for self-employed and employed people, so you shouldn’t find any surprises there. Most self-employed people will also need to pay Class 2 and 4 National Insurance contributions.

To make it easier to complete your yearly tax return, it’s worth establishing a process for recording your profits and keeping proof of business expenses (receipts etc) early on. You don’t need an accountant but you do need to stay on top of the paperwork.

You may also need to sort out insurance. For self-employed workers this is usually professional indemnity and public liability cover, but there are also other policies that might be worth looking into. In lieu of sick pay, for instance, some form of income protection might be sensible to help recoup lost earnings if you're unable to work due to illness or injury. On the subject of income security, setting money aside for retirement might be another priority, especially if you’re turning your back on a workplace pension to start a business at home. Plenty of private pensions exist, so do your research.

Finally, have a word with your landlord or mortgage provider to make sure it’s okay to use the house as your new office. You don’t want to inadvertently be contravening your tenancy or loan agreement by working from home. You’ll also need to find out if you have to pay business rates.

Do I legally need a business bank account?

As a sole trader, you’re not legally required to have a business bank account (the same isn’t the case for limited companies). There’s nothing to stop you, then, using your current account for business transactions as long as your bank allows this – check their terms and conditions first.

But (and it’s a big ‘but’), there are advantages in keeping business and pleasure separate when it comes to your finances. For a start, having a business account makes life a whole lot simpler when it comes to completing your tax return, especially if you need to keep track of allowable expenses, such as travel costs. Mixing them in with personal outgoings will only confuse matters.

A clear distinction between personal and company costs will also help when it comes to budgets and forecasts, and all of this ultimately adds up to less time spent bookkeeping – a chore few of us can genuinely say we enjoy!

There are other advantages to a business bank account. We’ll come onto business loans in Part Two, but it’s worth pointing out now that if you ever need to apply for one for your company, a business bank account is a smart way of proving you’ll be a good borrower, and so giving your application a greater chance of being accepted. That’s because it helps to build up a credit history for your venture, which business loan providers will look at closely before giving you the green light.

But they aren’t the only ones who might be swayed by a business bank account – your customers are worth considering too. Many people feel uneasy about paying into a personal account for goods and services, so if you want to look more professional a company name on the account might be a better option.

When it comes to finding which business bank account is best, shopping around and comparing helps. And don’t just look at monthly fees and plump for the cheapest. If you’re new to self-employment and nervous about the financial side, banks offering expert business support, especially face to face, might be a plus. Or perhaps you want a business bank account that offers convenience and time-saving features that can streamline your bookkeeping. In that case, take a look at our guide to online business bank accounts, many of which boast integrations with accounting software such as QuickBooks, Zero and Sage. Business bank accounts like Tide Banking and Anna Money also let you photograph receipts, match them to your statement and categorise them as an expense.

We hope this post gives plenty to think about and the confidence to start turning your side hustle from a nice idea to the next step. In part two of starting a side hustle in 2022 we outline ways you could finance your project, as well as offering some expert tips for turning a profit.