Can I Start a Business While I’m Still Employed

At Towerstone, we specialise in accountancy services for start up businesses and have written this article for employees starting a side business. The purpose of this article is to explain what to check first, how to manage tax and records, and how to stay compliant, helping you make informed decisions at an early stage.

This is one of the most common questions I hear from people who have an idea they cannot quite ignore, but who are not ready to walk away from the security of a regular salary. In my opinion, it is also one of the smartest questions you can ask before taking the leap. Starting a business while you are still employed is not only possible, it is incredibly common, and when done properly, it can be one of the lowest risk ways to move into self employment or entrepreneurship.

From experience, many successful businesses started life in evenings, weekends, and spare rooms, long before their founders handed in their notice. That said, there are legal, contractual, tax, and practical considerations that need to be understood before you begin. This is not an area where guessing is wise.

In this article, I will explain whether you can start a business while employed, what you need to check first, how tax works, what HMRC expects, and how to avoid the mistakes that cause problems later.

Is It Legal to Start a Business While Employed?

In most cases, yes, it is perfectly legal to start a business while you are still employed. UK law does not prevent someone from running a business alongside employment, provided certain conditions are met.

From experience, the biggest restrictions tend to come not from the law itself, but from your employment contract. Many people assume they are banned from doing anything outside their job, when in reality the position is often more nuanced.

In my opinion, the starting point is always your contract, not HMRC.

Checking Your Employment Contract Carefully

Before doing anything else, you should review your employment contract in detail. From experience, this is where most issues arise.

Contracts often include clauses relating to outside interests, secondary employment, or conflicts of interest. Some contracts require you to inform your employer if you take on additional work. Others restrict you from working in competing industries or using skills developed at work for personal gain.

In my opinion, the most important thing to look for is a conflict of interest clause. If your business competes with your employer, targets the same clients, or uses confidential information, you could be in breach of contract.

If your business is completely unrelated, such as an office worker starting an online retail brand, issues are far less likely.

Non Compete and Restrictive Covenants

Some employment contracts include non compete clauses or restrictive covenants. From experience, these are often misunderstood.

Most non compete clauses apply after employment ends, not during employment. They usually restrict what you can do for a certain period after leaving, rather than what you can do now.

That said, some contracts do restrict side businesses during employment, particularly in senior roles or regulated industries.

In my opinion, if there is any ambiguity, it is worth getting advice before proceeding. The cost of clarity is far lower than the cost of a dispute.

Do I Have to Tell My Employer?

This depends entirely on your contract. From experience, many contracts require disclosure of secondary employment, even if approval is not required.

In other cases, there is no obligation to tell your employer, provided there is no conflict of interest and the work is done outside working hours.

In my opinion, transparency can sometimes be beneficial, but it is not always necessary. The key is compliance with your contract rather than assumptions about what feels right.

Using Your Employer’s Time or Resources

One rule that is non negotiable is this. You must not run your business during your employer’s working hours or using their resources.

From experience, this is one of the fastest ways to create problems. Using a work laptop, work phone, work software, or work time to build your business can be classed as misconduct.

Even if your employer is relaxed culturally, the legal position is clear. Your side business must be kept entirely separate from your employment.

In my opinion, keeping clear boundaries protects you as much as it protects your employer.

Choosing the Right Business Structure

If you decide to start a business while employed, one of the first practical decisions is how to structure it.

Most people start as a sole trader because it is simple, low cost, and flexible. You register with HMRC for Self Assessment and declare your business income alongside your employment income.

Others choose to set up a limited company, particularly if they expect to reinvest profits, take on risk, or scale more quickly.

From experience, there is no one size fits all answer. The right structure depends on income levels, risk, and long term plans.

Registering With HMRC as a Sole Trader

If you start trading as a sole trader, you must register with HMRC by 5 October following the end of the tax year in which you start.

You will then complete a Self Assessment tax return each year, declaring both your employment income and your business income.

From experience, many people underestimate how important this is. HMRC does not mind you starting small, but they do expect you to register and report income properly.

In my opinion, registering early avoids unnecessary stress later.

How Tax Works When You Are Employed and Self Employed

This is where things start to feel real for many people.

Your employment income continues to be taxed through PAYE. Your business profits are taxed through Self Assessment.

The two are added together to calculate your total income for the year. This means your business profits may be taxed at higher rates if your employment income already uses up your personal allowance or basic rate band.

From experience, this often comes as a surprise. People assume the business income is taxed separately. It is not.

National Insurance Contributions

National Insurance is another area that needs careful attention.

As an employee, you already pay Class 1 National Insurance through your salary. As a sole trader, you may also need to pay Class 2 and Class 4 National Insurance on your business profits.

HMRC allows certain thresholds and exemptions, but from experience, this is often overlooked until the first tax bill arrives.

In my opinion, budgeting for tax and National Insurance from day one is essential.

What About VAT?

Starting a business while employed does not change the VAT rules, but it can affect how quickly you reach the VAT registration threshold.

The VAT registration threshold is currently £90,000 in taxable turnover over a rolling 12 month period. This applies to your business income only, not your employment income.

From experience, side businesses can sometimes grow faster than expected, particularly online businesses. Monitoring turnover is important.

In my opinion, accidental late VAT registration is one of the most common problems for growing side businesses.

Limited Company Considerations While Employed

If you set up a limited company while still employed, the tax picture changes.

The company pays corporation tax on its profits. You personally pay tax on any salary or dividends you take from the company.

From experience, many people leave profits in the company initially and continue living off their employment income. This can be a tax efficient way to grow the business.

However, running a limited company brings additional responsibilities, including Companies House filings, corporation tax returns, and ongoing compliance.

In my opinion, simplicity should not be underestimated when starting out.

Pensions and Benefits

Starting a business while employed can affect pensions and benefits in subtle ways.

Your employment pension continues as normal, but business profits do not automatically attract pension contributions unless you make them.

Certain benefits, such as child benefit, can be affected by your total income. From experience, side business profits can push people over thresholds unexpectedly.

In my opinion, understanding the wider financial picture matters just as much as understanding tax.

Time Management and Burnout

While this is not strictly a tax issue, it is one I have to mention.

From experience, running a business alongside full time employment is demanding. Evenings and weekends disappear quickly. Fatigue builds up.

In my opinion, realistic expectations are essential. Starting small, setting boundaries, and being honest about capacity makes success more likely.

Claiming Business Expenses

Even if your business is small, you are entitled to claim allowable expenses.

These might include equipment, software, marketing costs, a proportion of home office costs, and professional fees.

From experience, good record keeping from day one makes a huge difference. Trying to reconstruct expenses later is stressful and error prone.

In my opinion, separate bank accounts and basic bookkeeping are worth the effort.

Using a Separate Bank Account

While not legally required for sole traders, I strongly recommend using a separate bank account for your business.

From experience, this simplifies bookkeeping, makes tax returns easier, and reduces the risk of missing income or expenses.

For limited companies, a separate business bank account is essential.

Intellectual Property and Ownership

If you create something while employed, there can be questions about who owns it.

Some employment contracts state that intellectual property created during employment belongs to the employer, even if created outside work hours.

From experience, this is rare but not unheard of, particularly in technology or creative roles.

In my opinion, reviewing these clauses early avoids serious disputes later.

Insurance Considerations

Starting a business, even part time, may require insurance.

Professional indemnity, public liability, or product liability insurance may be necessary depending on what you do.

From experience, people often overlook this until a problem arises. In my opinion, that is a risk not worth taking.

What HMRC Looks For

HMRC does not object to people running businesses alongside employment. From experience, what they care about is compliance.

They want income declared, expenses claimed correctly, deadlines met, and records kept.

They are not interested in whether your business is your main focus or a side project. Tax rules apply regardless.

Common Mistakes I See

Over the years, I have seen the same mistakes repeated.

Not registering for Self Assessment. Not setting money aside for tax. Assuming profits are small so HMRC will not care. Mixing personal and business finances.

Another common mistake is waiting until the business grows before taking it seriously. In my opinion, that is backwards. The foundations matter most at the start.

When Does a Side Business Become a Main Business?

This is a personal decision, not a tax one.

From experience, people usually make the transition when business income becomes reliable, predictable, and capable of replacing a significant portion of their salary.

In my opinion, leaving employment too early is just as risky as staying too long. Planning matters.

How an Accountant Can Help

This is one of those situations where early advice pays dividends.

An accountant can help you choose the right structure, register correctly, budget for tax, and avoid mistakes that are hard to undo.

From experience, a short conversation early on often saves years of stress later.

What I Usually Recommend

I usually recommend starting small, staying compliant, and keeping things simple.

Check your contract. Register properly. Keep records. Set aside tax. Review progress regularly.

In my opinion, slow and steady often wins in the early stages.

A Practical Conclusion

So, can you start a business while you are still employed? Yes, in most cases you can, and for many people, it is the smartest way to start.

From experience, the key is understanding the rules, respecting your employment obligations, and treating the business seriously from day one.

Done properly, starting a business while employed can give you confidence, momentum, and options for the future without unnecessary risk.

If you would like to explore related guidance, you may find Can I use personal money to pay for business costs and Can my accountant file my Self Assessment and company tax return together useful. For a wider overview of support for new businesses, visit our Start Up Careers Hub.