- Check your employment contract before starting a side hustle as exclusivity clauses may apply if you earn above £129 a week
- Key insurance covers to consider include public liability, professional indemnity, and employers’ liability insurance
- You can structure your side business as a sole trader, a partnership, or a limited company – each with different levels of liability
- HMRC gives you a £1,000 tax-free trading allowance each year
Thinking about setting up a side hustle but aren’t sure about your legal obligations? We’ve worked with Arag to create this guide, which gives an overview of the legal obligations involved with running a side business.
Arag is our business legal expenses insurance provider and they’re experts in justice and legal services for both individuals and businesses.
Running a side business: what about my main job?
If you’re an employee, you have an obligation not to compete with your employer. Some employers will often include express terms in your employment contract saying that you can’t compete with them. Your contract might also say that you need to ask their permission to start a side hustle.
But the law now offers strong protections for lower-paid workers. If you earn below the lower earnings limit, which sits at around £129 a week in 2026, exclusivity clauses in your contract are unenforceable. This means your employer generally can’t stop you from taking on extra work to boost your income.
If you earn more than this threshold, exclusivity clauses and restrictive covenants might still apply to you. This includes non-compete clauses and non-solicitation clauses that stop you from approaching clients you met through work. Before starting a side hustle, check your employment contract to see if you need to ask for permission.
Your employer might still have concerns that your side hustle will impact your working time. Working time regulations set out exactly how much rest and time off employees should get between shifts.
Are there licenses I need to start a side business?
This depends on the side hustle you want to start. All businesses need to follow legislation that governs what you can and can’t do when it comes to selling goods and services.
It’s best that you find out what obligations are in place for your industry, including whether you need any business licences.
You should do this before you start trading to avoid action from your local authority, the police, or the health and safety executive.
What side hustle insurance do I need?
It’s important that you think about business insurance before starting your side hustle. The main covers include:
- public liability insurance – this covers you if a member of the public gets injured or loses out financially and blames your side hustle
- professional indemnity insurance – if you give advice or provide a service to clients, this protects you if your client loses money because of bad advice, services or designs
- employers’ liability insurance – if you grow your side hustle and eventually you decide to take on staff, you’re legally required to have employers’ liability insurance
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If you’re running a business from home, it’s a good idea to get in touch with your home insurer as you might not be covered for business activities.
If you want to become a member of a professional body, they might require you to have business insurance. Some venues and suppliers might also require you to have insurance as part of your contract with them.
What legal structure should I choose for my side hustle?
There are three types of legal structure:
Setting up as a sole trader is the easiest option. Once you register as self-employed with HMRC and start trading as an individual, you’ll be classed as a sole trader. The main disadvantage is that you’re personally liable for all debts, meaning your own assets are at risk if your business struggles.
If you’re setting up your business with someone else, you can register as a partnership. Someone will have to act as the nominated partner who deals with business records and tax returns.
If you set up a limited company, your personal assets remain separate from your business assets. This means lenders can’t use your personal savings for any business debts. But setting up and running a limited company comes with far more legal and financial obligations.
Read more about the differences between a sole trader vs a limited company.
What about side business tax in the UK?
You need to pay tax on your earnings. HMRC gives you a single £1,000 tax-free trading allowance each tax year for your side hustles. If you earn over £1,000 from your side hustles before expenses, you must tell HMRC so you can avoid any unexpected tax bills.
Sole traders and business partnerships pay income tax on these earnings. You’ll need to register as self-employed with HMRC and send an annual Self Assessment tax return. Limited companies pay corporation tax instead.
There are business expenses you can deduct from your profits to calculate your total taxable income. But tax is complex, so if possible, speak to a professional accountant or tax adviser to understand more.
To help reduce admin for small business owners, the UK government is introducing a new online reporting tool by 2029. You’ll be able to use this tool to easily tell HMRC if you earn between £1,000 and £3,000 from side hustles, rather than having to complete a full Self Assessment return.
Read more about paying second job tax.
What about my side hustle’s intellectual property (IP)?
Intellectual property (IP) is anything you artistically create. This includes brand names, songs, new inventions, or unique symbols. Developing your new product, service, or brand helps you stand out from your competitors.
You should always make sure that you’re not copying another business’s brand, product, or logo to help boost your own sales. Both small and big businesses will try hard to protect their IP, so do your research before trading. You can formally protect your own IP by registering trade marks or patents.
How legal expenses insurance can help
Legal protection insurance covers business legal expenses or prosecution fees for situations like employment tribunals, HMRC tax investigations, or civil actions brought under the Data Protection Act.
If you have legal expenses insurance as part of your Simply Business policy, you also have access to a number of useful services through Arag Businesslaw (you’ll just need your voucher code found in your policy documents to register).
Arag has a legal advice helpline, available whether you’re facing a serious legal issue or just want to check something with an adviser. They also offer a range of legal templates and guides.
More guides for side hustlers
- Best small business ideas to start in the UK
- How to start a business
- How to go self-employed in the UK
- Side hustle stories: 2 founders share their tips to start a side hustle
Ready to set up your cover?
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