It is a common belief that being ‘employed’ and ‘self-employed’ is different in fact opposite. However, it is not true. Under HMRC, it is possible that you are employed and self-employed at the same time. The tax liabilities when you are freelancing on the side increase with your income. In case you are planning to earn some extra money by freelancing in your free time, you need to know everything that applies to your income including self-employment tax and national insurance.
There can be many reasons for being employed and self-employed at the same time which may vary from earning extra money or starting a small business while being on full or part-time employment. Let’s understand what all it takes for these two factors walk together.
Please note that the income tax is calculated based on the total earnings and not how you are earning it. Everything including your employment and sole trader profits is taxable after excluding the personal allowance. Also, your total income may fall in a higher tax slab which means you will need to pay more taxes.
Income from an employer £40,000
Profits from sole trade (self-employment) £30,000
Total salary £70,000
Personal allowance £12,500
Total taxable income £54,000
Income Tax paid at the basic rate (20%)* £7,500
Income Tax paid at a higher rate (40%)* £8,000
Total Income Tax paid £15,500
If you have noticed, up to £50,000 the tax percentage is 20% while anything that goes above that is taxable under 40% tax slab. When you file your self-assessment return for the current financial year make sure you disclose the tax which has already been paid by your employer. This will inform HMRC that a part of the tax on your income has already been spent. To understand it better, you can take the help of an accounting service provider.
The National insurance that you have to pay will not change for the income from the employer. However, if the profits go beyond £6,365, you need to pay a £3 every week which is called Class 2 national insurance. Class 1 insurance is paid directly by the employer while class 2 is paid to HMRC via direct debit.
If your self-employed income is between £8,632 and £50,000, you will pay 9% and 2% for all profits above £50,000.
Sole trader or limited company:
This is what you need to decide based on the nature of your business. If you are a sole trader, you will be the sole responsibility for all the tax liabilities, invoices, accounting. However, if you form a limited company, it will make your business a separate identity, and you have fulfilled your duties as a director. The limited company comes with different liabilities.
If you are a sole trader, you will be liable to pay taxes on profits only after deducting the expenses. What can be inferred from the total income and what cannot be, is a complicated affair and you should consult accounting firms the UK for more details.
It is a legal requirement to tell HMRC about your new source of income as soon as possible. Your employer will not come to know about it, and he or she should not have any problem with that either, but if a clause in your agreement that you cannot work on the side you need to be very careful while entering the freelance world while under an employee. It is better to choose a field which is entirely different from your current employment or does not affect your job.
You can browse through chekin.co.uk to get information on reputed accounting service providers.
P.S. Looking for Payroll outsourcing for contractors and freelancers. Contact Reliasys