Contrary to popular belief, the terms ‘employed’ and ‘self-employed’ are not opposites. In the strange world of HMRC, it’s possible to be employed and self-employed at the same time – in fact, it’s actually pretty common. But what implications does working on the side have for your freelance tax liability?
If you’re considering making a bit of extra money by working for yourself on top of your main job, read on for everything you need to know, including what self-employed tax and National Insurance you’re expected to pay, and how to pay them.
There are various reasons why someone might want to be employed and freelance (self-employed) at the same time. Some might want to earn a little more. Others might be more entrepreneurial – many small businesses are started by people in full or part-time employment, and later grow to become full-time businesses.
Whatever your reasons, you need to know that there’ll be some tax issues for you to think about – so let’s get to the nitty-gritty.
How much income tax will I pay as a freelancer?
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.
An example for the 2018/19* tax year:
|Income from employer
|Profits from self-employment
|Total taxable earnings
|Tax paid at basic rate (20%)*
|Tax paid at higher rate (40%)*
|Total tax paid
*for 2018/19, there are different income tax rates for Scottish residents
You’ll pay 20% tax on all earnings exceeding your personal allowance and below the upper limit of the basic rate, which is currently £34,500. This includes all your income from your employer and £11,350 of your profits from self-employment.
You’ll pay 40% tax on all earnings above the lower limit of the higher rate, in this case, on the remaining £8,650 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.
Confused about Self Assessment? Read our article ‘Do I have to fill out a Self Assessment tax return?‘
What about National Insurance?
The National Insurance you pay on your employed income won’t change, but it’ll be a bit different for your self-employed profits.
Firstly, if your self-employed profits exceed £6,205, you’ll have to pay a flat rate of £2.95 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 online at Gov.uk.
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 £8,424 and £46,350, and at 2% for all profits greater than £46,350.
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 @ £2.95/week)
|Class 4 National Insurance (9% on earnings over £8,424)
|Total National Insurance paid
Remember, you’ll have your Class 1 National Insurance to pay too, through deductions made by your employer for your paid employment, 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’re liable for all activities of the business as if you performed them yourself.
If you form a limited company you create a separate legal entity and you have no personal liability. However, you’ll have specific legal and statutory responsibilities to fulfil as a director of the company. This also has a number of tax implications.
Read more about the differences between sole traders and limited companies.
What about expenses?
One of the main benefits of registering as self-employed as a sole trader is that you get to offset your expenses to pay a reduced amount of tax. This is because you’re 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 and how to claim is a complicated affair, so we won’t get into that here. Instead, take a look at our jargon-free business guide here, and bear in mind the “wholly and exclusively” rule (i.e. anything you claim as a business expense must be entirely for business use).
The Crunch Personal Tax Estimator
The Crunch Personal Tax Estimator can help you to plan for the tax you may have to pay on your personal income including sole trade income, salary & dividends if applicable. You can download the spreadsheet for free and find out what you need to fill in with our Personal Tax Estimator article.
When should I tell HMRC?
Although your employer doesn’t need to know, the taxman definitely does! HMRC recommend that you let them know as soon as you start trading from your new business.
It’s a legal requirement to register with HMRC 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 employed full-time, this is likely to happen as soon as you receive your first self-employed income. Once this happens, you’ll have until 5 October after the end of the tax year to register and let HMRC know, or risk paying a fine. You can get in touch to let them know by using this simple form.
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, especially if there is a risk of competition with your current employer.
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 form a limited company your details are publicly available at Companies House, so your employer could find out about your business that way.
Of course we’d never recommend that you mislead your employer. However, it’s possible to start outside work without disclosing it. Just be aware that you do so at your own risk.
Our article ‘How to set up a small business while working on the side’ will give you practical tips on taking those first steps.