I have opened up the relevant dds file in gimp, changed the colour of some clothes and then saved it as a copy in the textures folder. Then when I went to apply it to a duplicated version in the object window (after creation a new texture set in the object window), it seems to require .nif files instead of .dds files.

I have nifsope but haven't used it yet. I checked to see if nifscope could save a dds file to .nif but it doesn't seem to be an option. I can find lots of tutorials on retexturing things like npcs and furniture but not for armor and clothes.

Do I need to convert the dds file to nif and then link it to the duplicated vanilla item? I don't want to retexture every version of the item in the game, but simply to create a new set.

Any help would be much appreciated

No, TextureSets are applied to 'sub-sections' of a mesh that are defined in the nif file. See the bottom of http://www.creationkit.com/TextureSet for more info, and also see http://www.creationkit.com/Model_Data.