Thinking of setting up a side business? Here's what to consider

So, you've had a good idea for a business, but for whatever reason, you don't want to quit your day job and go for it full time. Maybe you're cautious about taking such a big risk? Or simply don't think it will be lucrative enough to fully support you right now.

You're not alone. In tough economic conditions, side hustles are becoming increasingly popular, with research from recruitment firm Roger Walters earlier this year finding that three-quarters of UK professionals would consider starting one up – and a third saying they plan to launch one this year.

"Side hustles can greatly enhance a professional’s main role and their CV – by helping them bring in fresh ideas and perspectives, pursue a passion project as well as developing transferable skills which can improve their existing capabilities," says Roger Walters director Lucy Bisset.

In some cases, a side hustle does well enough to become a proper business – and this is where things get more complicated; with implications for everything from tax and insurance to cashflow and marketing.

So how do you put your side hustle enterprise  on a professional footing?

Your first step should be to create a business plan. While this might seem like overkill for a comparatively minor project, it will help you understand your costs, discover whether there's a market for your product or service, and set your prices – indeed, it might reveal that your idea has the potential to actually be a full-time business. 

There are plenty of templates available online, but, in essence, you'll need to consider your target market and competition, how you'll market your business, your budget and cashflow, your finances, while not ignoring potential business risks.

Then there's the legal and organisational issues. As a fledgling business owner, you'll probably want to register as a sole trader, though a partnership or limited company may be a more appropriate option. Setting up as a sole trader involves very little paperwork and allows you to get started immediately. 

Partnerships come in a variety of types – there's information from the British Business Bank here. With a limited company, meanwhile, all business assets, liabilities and profits belong to the company itself. Therefore, so that in the event of legal disputes or debts, it's the company that's liable, rather than the directors. 

You'll also need to make sure you're on the right side of HM Revenue and Customs (HMRC). If your annual sales – not profit – amount to less than £1,000, it's considered casual income and you don’t need to inform HMRC. If you've brought in more than that, though, you may need to complete a Self-Assessment tax return.

Those who earn over £3,000 will still need to submit a Self-Assessment, and those who earn under £1,000 won’t need to pay any tax.

There's specific advice for side hustles from HMRC here, on whether you need to pay tax.

Meanwhile, from next April, Making Tax Digital for Income Tax will come into effect for anyone with more than £50,000 in combined turnover from self-employment or property – and it's important to note that this figure is calculated on gross income before expenses. 

"That means a self-employed builder who invoices £60,000 in a year but spends £25,000 on materials still falls within MTD, even if their taxable profit is closer to £35,000," says George Holmes, managing director of business finance firm Aurora Capital.

"The risk is that many small traders and landlords assume they’re under the threshold because their profits are modest, when in reality their turnover makes them eligible next April."

Depending on the nature of your business, you may need a licence – for example, if you're working in childcare, healthcare, finance, or food.

It’s recommended that you set up a separate bank account for your business, invest in a decent accounts package and consider hiring an accountant. And you may well need insurance – product liability insurance, if you're selling physical goods, especially food, cosmetics, or children's items; professional indemnity insurance if you’re offering advice, coaching or consultancy; or goods in transit insurance if you’re regularly sending products through the post or via courier.

You'll also need to comply with the General Data Protection Regulation (GDPR) if you're collecting or storing customer data.

But while all this may seem daunting, a recent survey from online company formation firm 1st Formations found that nine in ten people who set up a small business were happier as a result - mostly for financial reasons.

"It’s incredibly encouraging to see most small business owners report greater happiness after starting their own ventures”, says Graeme Donnelly, CEO and founder of 1st Formations. 

“And it’s understandable why nearly a third were driven by the potential for financial freedom. Clearly, many have found the opportunity to directly influence their earnings to be a rewarding experience."

If you are looking to grow your side hustle into a proper business, speak to our experts at Howden to make sure you have comprehensive cover for anything that happens along the way to your side-hustle success.