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Doing a bit of cheeky contracting alongside your job is an increasingly popular way of subsidising your income. Many choose to keep this under wraps from their employer. However, while you may not want your boss to know of your side venture, you can’t hide it from the taxman.
Hopefully those who started contracting before the beginning of this tax year (April 5th 2014) will already be up to speed for the looming Self Assessment deadline, but for those who are new to the game, here’s some important know-how to fully prepare you for next year:
You’ll need to complete a Self Assessment so that the tax man knows exactly how much extra cash you’ve been making and therefore how much tax you need to pay on top of what you already part with each month through PAYE.
Completing your Self Assessment online is probably the easiest way to do it. You can also file by post but you will need to ensure you have completed by 6th October. If you choose to do the process online, you’ll have right up until the final bell at midnight on 31st January.
Either way, you’ll need to register with HMRC to tell them you need to submit a tax return. You must register by 5th October in the tax year after the one you need to file a tax return for – for example, if you need to file for this tax year (2014-2015), you should register by 5th October 2015. If you miss this deadline, you’ll have to pay a penalty.
You can register online, by post or by phone – always make sure you give yourself enough breathing room incase anything goes wrong. To register you will need:
After you have registered, HMRC will send you a Unique Taxpayer Reference number, which you will use to fill out your Self-Assessment. You can learn more about registration and accurate record keeping here.
Income tax is calculated on total money earned, so you’ll have to pay for any earnings that exceed the personal allowance on your combined income through your gross salary and self-employment profits – the amount left over after all expenses have been deducted.
Remember, your self-employment profits could push your total earnings into a higher tax band, which means you’ll have to pay a higher rate on that chunk.
|Gross salary under PAYE (from employer)|
Profits from self-employment (operating as a sole trader)
Personal allowance for those born after 5 April 1948
(this can vary depending on circumstances)
Total taxable earnings
Tax paid at basic rate (20%) on first £31,865
Tax paid at higher rate (40%) on remaining £3135
Total tax paid
The amount of tax you pay on your income through employment will be worked out by PAYE so you only have to worry about paying the remaining tax owed through your self-employment profits.
It sounds complicated, and it is, but HMRC will lend a hand with some of the calculations. You simply enter the amount you were paid in the previous tax year, which you can find in your P60, as well as the amount you’ve earned through your self-employed work, and HMRC will tell you how much money you owe the big man.
It’s never that simple. While the National Insurance you pay on your employed income won’t change, you’ll have to pay extra on your self-employed profits.
If your self-employed profits exceed £5,725, you’ll have to pay a flat rate of £2.75 per week on Class 2 National Insurance. Please note: If you’re earnings through self employment are lower than this, you won’t need to pay Class 2 National Insurance. You’ll already pay Class 1 National Insurance through PAYE via your employer but Class 2 is paid directly to HMRC through a weekly direct debit. You can register for that here.
If you’re doing really well, you’ll have to pay Class 4 National Insurance as well. This is charged at 9% for all self-employed profits between £7,956 and £41,865, and at 2% for all profits greater than £41,865 All of this will be worked out by HMRC when you come to file your tax return.
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
As a sole trader, it’s good practise to save 30% of all of your self-employed earnings each month, although this will change if you register as a limited company. Here’s some information on whether becoming a limited company may be the best option for you.
You may not actually have to pay this whole amount but it’s a good benchmark to ensure you’re covered when it comes to do you Self-Assessment. We’ve seen far too many people find themselves in a sticky wicket when they don’t have the cash to pay the bill.
Now comes the fun part. You’ve registered with HMRC, you know vaguely how much cash you owe and you’ve got a healthy stash to cover it. The exact amount you will have to 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.
We would always recommend filing your tax return as early as possible. This can be done anytime after the start of the new tax year, so long as you’ve registered and received your unique code from HMRC. Filing late will incur fines and leave you with a stressful festive period.
Once you’ve logged into the system, the process is not actually that daunting – so long as you have kept accurate records, which include all invoices and expense receipts. Essentially you’re just filling out a form and the system does the calculations for you.
After you’ve double checked that all the information you’ve entered is correct, press submit and breathe. HMRC will tell you how much tax you owe and you then hand over the cash, usually via bank transfer.
This is just a guide – taxes change depending on your individual circumstances. For more personalised advice and to speak to one of our finance professionals, give us a call on 033 3311 8001.