Contrary to popular belief, the terms ‘employed’ and ‘self-employed’ are not antonyms. In the strange metaphysical realm of HMRC it is possible to be employed and self-employed at the same time. In fact, it’s actually pretty common.

But what implications does this have for your tax liability? If you’re one of the UK’s growing number of part-time freelancers, read on for everything you need to know about paying your tax.

Why freelance on the side?

There are various reasons why someone might want to be employed and self-employed at the same time. Some might want to earn a little more than what they get from their employer. Others might be more entrepreneurial – many small businesses are started on the side by people in full or part-time employment, and later grow to become full-time endeavours.

Whatever your reasons, you need to know that there will be some tax issues for you to think about. The government plans to raise £9bn over the next five years from clamping down on tax avoidance, so it’s really important that you’re up to speed.

So let’s get to the nitty gritty.


How much income tax will I pay?

Income tax is always calculated on total money earned, so you’ll have to pay for any earnings that exceed the personal allowance on your combined employed income and self-employed profits. We’ll talk about the difference between income and profits a bit later.

It’s important to realise that if your self-employed profits push your total earnings into a higher tax band then you’ll have to pay the higher rate on that chunk.

An example for the 2014/15 tax year:

Income from employer


Profits from self-employment


Total earnings


Personal allowance for those born after 5 April 1948


Total taxable earnings


Tax paid at basic rate (20%)


Tax paid at higher rate (40%)


Total tax paid


You will pay 20% tax on all earnings exceeding your personal allowance and below the upper limit of the basic rate, which is currently £31,865. This includes all your income from your employer and £6,865 of your profits from self-employment. You will pay 40% tax on all earnings above the lower limit of the higher rate, in this case, on £3,135 of your profits from self-employment. The amount you pay on the income from your employer will be worked out using PAYE.

The amount you pay on your profits from self-employment will be worked out using an annual Self Assessment tax return, which can be filled out online here.

What about National Insurance?

The National Insurance you pay on your employed income won’t change, but it will be a bit different for your self-employed profits.

Firstly, if your self-employed profits exceed £5,885, you’ll have to pay a flat rate of £2.75 per week. This is called Class 2 National Insurance.

You usually pay Class 1 National Insurance through PAYE via your employer, but Class 2 is paid direct to HMRC through a direct debit, which you can register for here.

If you’re really doing well for yourself, you may also have to pay Class 4 National Insurance. This is charged at 9% for all self-employed profits between £7,956.01 and £41,865, and at 2% for all profits greater than £41,865.

Just like your Income Tax, Class 4 National Insurance contributions will be worked out on your Self Assessment tax return.

Let’s use the same figures from our previous example to demonstrate how this all works –

Profits from self-employment


Class 2 National Insurance (52 weeks @ £2.75/week)


Class 4 National Insurance (9% on earnings over £7,775)


Total National Insurance paid


Remember, you’ll have your Class 1 National Insurance to pay too, which you can find details on here.


Sole trader or limited company?

As a self-employed person, you can either choose to operate as a sole trader, or form your own limited company.

The basic difference is that if you’re a sole trader then there’s no legal separation between you and your business. You are liable for all actions undertaken by the business as if you performed them yourself.

If you form a limited company you create a  separate legal entity and decrease the amount of personal liability you have in the business. This also has a number of tax implications. Read more about the differences between sole traders and limited companies here.

What about expenses?

One of the main benefits of registering as self-employed is that you get to offset your expenses to pay a reduced amount of tax. This is because you are only taxed on your self-employed profits, meaning your total self-employed income minus any allowable business expenses.

What exactly is considered to be an allowable expense is a complicated affair, so we won’t get into that here. Instead, take a look at what HMRC have to say, and bear in mind the “wholly and exclusively” rule (i.e. anything you claim as a business expense must be entirely for business use, and for business use only).

Will my employer find out?

Although it usually won’t be a problem, it’s understandable that you might not want your employer to know that you’re working on other projects. Be careful, though, because your employment contract might forbid you to take on outside work.

Your tax affairs are entirely confidential and HMRC will not inform your employer if you also register as self-employed. However, be aware that if you register as a limited company your details will come up on searches of Companies House, so your employer could find out about your business that way.

Of course we would never recommend that you mislead your employer. However, it is possible to start outside work without disclosing it. Just be aware that you do so at your own risk.

When should I tell HMRC?

Although your employer doesn’t need to know, the taxman definitely does! HMRC recommends that you let them know as soon as you start trading from your business.

As far as hard and fast deadlines go, it’s a legal requirement to register with the taxman as a new business as soon as your combined earnings (from your full-time employment and any other work) exceed your personal allowance.  If you’re already full-time employed this is likely to happen as soon as you receive your first self-employed paycheque.

Once this happens you’ll have until October to let HMRC know, or risk paying a fine.

You can get in touch to let them know by using this simple form.

Photos by Steve Davidson & Ken Teegardin

  • szef

    How does paying dividends vs salary for the Ltd change the tax picture?

    • Nick Chowdrey

      Hi szef. Dividends are taxed at a different rate to regular PAYE salary – so if you’re freelancing on the side you could make some savings by setting up your own limited company, paying yourself through dividends rather than salary.

  • Hi, so if you work for an employer and go on maternity, freelancing while on leave doesn’t forfeit your SMP if you declare it to HMRC? Just looking for clarity as I’m receiving lots of conflicting advice.


    • lesleyfurber

      HI Robyn, I don’t believe it does, but I would check this with the HMRC to be on the safe side. You obviously can’t work at all for the first 2 weeks after you give birth Regards, Lesley, The HR Kiosk

  • Puvan

    That was so helpful and informative! Thanks for the facts without all of the useless jargon 🙂

    • Thanks Puvan – glad you found it helpful 🙂

  • Robyn Elliot

    I would benefit from some advice, please.
    I currently freelance and i am working full time. At the moment I do this for the same company and that company process all of my tax for me through PAYE (it then becomes like a second income).
    I think it would be in my interest to register as self employed with HMRC for my freelance work, but i would still like to undertake this for the company I am employed by. The advice I am being given is that because I am an employee they must process my tax on the freelance work i do for them. Is this the case?

    • Hi Robyn,

      The company are most likely insisting they process your payroll because if they don’t you could be opening yourself up for IR35 trouble (where HMRC will decide you are an employee even though you are being paid as self-employed) – give this a read and let us know if you have any more questions –

      • Robyn Elliot

        That’s great. Thanks very much.

    • Suzanne

      My husband has been offered either redundancy or reducing his days from 5 to 3 which he has accepted. He is going to freelance in the other 2 days for different companies. However, if the company he works pt for wanted him to occasionally go in on a freelance basis on the 2 days he doesn’t work for them, is this ok?

      • lesleyfurber

        Hi Suzanne, yes that should be fine. He can be both employed and self-employed at the same time; and his yearly tax return would need to reflect this. Regards, Lesley, The HR Kiosk

  • Natalie

    Hi there, my husband is thinking about setting up a sole trader as well as full time employment. I’m rather confused on the income tax calculation. For example he earns around £26,000 gross and say we plan on profits of £10,000 through this sole trader. Total gross income is £36,000 less the personal allowance of £10,000. Total taxable income is £26,000. Basic rate tax of 20% = £5,200.00. Obviously his employer will be taking income tax from him so will he still need to pay the full £5,200 or is this calculated through self assessment? as I would of thought he would be paying income tax twice. Thank you

    • Hi Natalie,

      The portion of his income earned through employment will have Income Tax + NICs deducted automatically, the rest of his income he’ll have to pay tax on when he completes his Self Assessment. When he’s filing he can tell HMRC how much he earned through employment, and they’ll take that into account to make sure he uses his Personal Allowance etc.

      It’s a bit of a complicated process – this slideshow might help you get your head around it –

  • Marie clark

    Hi, if I am employed part time with a company and then work freelancing for another company for 10 hours or so a week, is this ok?

    • Crunch Accounting

      It should be fine assuming you haven’t signed a contract with your employer that prevents you from doing such things (if the company you were freelancing for was a competitor, for example).

  • Ali W

    Hi I’m currently employed as a teaching assistant 4 days a week. This is part time and my annual income is £10,688. I want to start a soft furnishings business alongside this. How do I go about this and how much tax should I set aside?

  • Adem Djemil

    Hi I earn less that £5,885 from my self-employed work but have still been paying the Class 2 NI contributions (I pay Class1 through my employed work where I earn £23,000).

    Is there a way I can claim this back especially as it says the forms are now not valid

    I know that HMRC are introducing a new system for 2015/16 but any advice would be great as I’m not sure how being exemput would effect pensions etc later in life.


  • steven vaughan

    I am currently employed full time and my earnings are 26000 a year the business ill be starting will b occassional work and not earning anymore than 10000 a year infact no where near that what would mine and my partners steps be to starting this do we have to register the company and what about tax and national insurance

    • Crunch Accounting

      Hi Steven – At that level of earnings you’d probably be best off setting up as a sole trader – you’d just need to register a new business with HMRC and get a personal UTR –

      Then pay tax on those earnings when you file your Self Assessment. Once profits are around the £20,000 mark you could think about going limited. Calculator to help you work it out here –

  • James Reid

    Hi there, I’m currently in full time employment earning £20,000 before tax so walk away with about five grand less than that. I’ve been doing freelance work here and there and have earnt way less than £1,000 over a whole year and can’t imagine it ever going above that at my current rate. My freelance work comes in dribs and drabs and is never consistent where I’m earning the odd £100 every few months if I’m lucky. Would I still have to register something and pay tax on that? Any help would be most appreciated as I don’t want to get fined for earning peanuts and topping it up with some banana peal. I don’t understand the whole tax thing at all, even after reading the article I’m lost as to what I should do.

  • Lucy

    Hi there,
    I am currently working full time earning £24k as a single mother. I get a little hit of child tax credits say around another £2k p/a. I am looking to start a small sideline making children’s clothing etc. I expect my earnings from self employment will only be around £1k max. How will this effect me tax wise? Will I be paying the £2.75 p/w as standard? Or will I end up paying more?

    • Crunch Accounting

      Hi Lucy,

      See our answer to Jasmina above – looks like you’re both in the same situation! Give us a shout if you need any more help 🙂

  • Crunch Accounting

    Hi Jasmina,

    You’d need to set up as a sole trader as soon as you start trading, and you’ll pay income tax @ 20% when you complete your Self Assessment. You wouldn’t need to pay National Insurance as your profits would be too low.

    For the registration you’d need to register by the October following the April after you started trading – for example if you start trading in Sept 2014 you’d need to register by 5th Oct 2015. The form you’ve linked to is the one you’ll need to fill out.

    Hope that help!

  • Jayse Luna Sheward

    i am current working a full time employed job earning £1125 per month gross. i am also working self employed earning £170 a week as well as. Works out to £13500 gross for the employed job full time and £8840 for the self employed job, per year. what am i going to be paying tax on? how much? i’m trying to work out my bottom line figure of profit for myself and struggling to work it out. Many thanks

    • Crunch Accounting

      Hi Jayse,

      The tax on your earnings from employment are taxed at source, so you don’t need to worry about them. It’s up to you to pay tax on your self-employed earnings by filing a Self Assessment.

      At those figures you’ll end up paying Income Tax of £1,768, Class 2 NICs of £70 and Class 4 NICs of £146 on the self-employed earnings, so your total tax bill on your self-employment will be about £2,000. You need to put that aside (in a savings account or something) to pay later.

      Hope that makes sense!

  • Matt

    Thank you for amazingly helpful website! I was wondering how will the taxation go if I am working only as a freelancer as I am a full-time student? My annual income would stay under £10 000 and I would thus get the taxes refunded in the end of tax year – do I need to set up my own trade name for this?
    Thank you!

  • CK

    i was hoping for some help.
    i am currently registered as unemployed. I am a training dancer, and my Granddad helps to support me financially. I have started to seek and get booked for a few promotional jobs, only about 20 hours a week, max. How do i go about changing my status and how do i pay tax?
    Thank you!

  • Ombudsmandible

    Hi, I have the chance of working freelance for a US company through an online intermediary called Upwork. Upwork will charge 10% of what I earn for processing payments from the US company. Can I claim the 10% as a business expense? Thanks for all the great info here!

    • Stan

      I’m 99% sure you can. E.g. you’d say your income was £100 and that £10 of that was expenses.

  • Eliza

    My husband has his own business , and working some weekends on the side earning approx 2k a month extra ….should he declare it to hmrc

    • Stan


  • Emma

    I am about to be made redundant with my current company, but they have asked me about an opportunity as working for them on a freelance / sole trader basis (only a couple of days a week) alongside working for other companies on the same basis. Am I still entitled to my full redundancy payment (3 months notice) and 6 weeks statutory (6 years service) if they take me on straight away as a sole trader? This was something I never considered when the discussions were started. I don’t want to lose out on my redundancy as this will be a buffer as I will be working less days, but I also don’t want to miss the opportunity to set up as a sole trader if the work is forthcoming.

    • Stan

      I would imagine you are – you almost have to view the employed you self-employed you as separate people. The employed you is still getting redundant, and then a new contract is made for the self-employed you. I’m 99% sure this is what would happen unless its explicitly stated in your original contract. I’d contact the citizens advise bureau, they are great at these sorts of things.

  • Toni Symiah

    I am a freelance graphic Designer and now want to add freelance admin assistant. Do I need to register two separate freelance businesses or can I put them both under freelancer?