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Tax When You’re Employed and Self-Employed

In this guide, I’ll walk you through the tax implications of begin employed and self-employed whether you are a side-hustler, aspiring entrepreneur or working on your master plan to work for yourself.

I’ve updated this post on 10 November 2020

Can you be Employed and Self-Employed at the Same Time?

Yes, you can and if you want to want to work for yourself full-time holding onto a job can be a great way to get together startup money you need or bump up your income until your business grows to a point where it can pay you a full-time salary.

If you are planning to hold onto your job, I’d recommend you check whether you are under any contract that prohibits you from being self-employed and also advise you against treading on your Employers toes, for example, by stealing clients – you don’t want to get a bad reputation and jeopardise your employment.

Tax When You Are Employed and Self-Employed

If you look at your payslip, you’ll see that all your earnings are paid to you after deducting tax and national insurance – no drama, your employer handles it all for you.

However, once you start working for yourself you need to start following the rules of self-employment tax on those earnings only, that’s because the money you get paid by your clients is untaxed.

Self-Employment Taxes Explained

When Should You Register as Self-Employed?

In summary, you’ll need to register as self-employed once your business income (not profit) goes over £1,000 and pay income tax as well as Class 2 and Class 4 national insurance on your business profits.

The reason you don’t need to register as self-employed when your income is below £1,000 is because there is an allowance call the UK Trading Allowance which lets UK taxpayers earn £1,000 without having to let HMRC know and registering as self-employed. This allowance is really aimed at people who do a little babysitting or sell bits and bobs on eBay, so if you are planning to set up a business then you may want to register as self-employed so you can record a tax loss and reduce your tax bill in the future, for example.

How to Register as Self-Employed

How Much Tax Will You Pay on Your Self-Employment Income

When you’re self-employed, you pay income tax and national insurance based on your business profits – that means all your business income less allowable expenses and any other allowances and reliefs you are entitled to.

Income Tax

Income tax is a cumulative tax, that means the more you earn the more you pay. So when you are employed and self-employed, you’ll pay income tax based on ALL your taxable income.

The current income tax rates are:

 2020/20212019/2020
Personal Allowance£12,500£12,500
Basic rate 20%£12,501 to £50,000£12,501 to £50,000
Higher rate 40%£50,001 and £150,000£50,001 and £150,000
Additional rate 45%over £150,000over £150,000

So if you are employed on a salary of £25,000 and have business profits of £20,000, you’ll pay income tax of £6,500 based on your combined income of £45,000, worked out as:

£12,500 x 0% = £0
£32,500 x 20% = £6,500

You’ll notice that your first £12,500 of income is tax-free since it is covered by your personal allowance. When you are employed and self-employed it’s really important that you only claim this allowance once otherwise you’ll end up owing HMRC money.

To avoid this problem then you should check your payslip and find your tax code. The most common tax code in use for 2020/2021 is 1250L which means your employer will be giving you a portion of your tax-free allowance every time they pay you. If you have used all your personal allowance up in your employment, then all your self-employment profits will be taxed at least 20% or more. If you haven’t used up all your personal allowance you’ll get credit for it when you declare your income to HMRC (more on that later).

National Insurance

National insurance is more straight forward when your employed and self-employed, they all work in isolation.

National Insurance Rates

You’ll be paying Class 1 national insurance on your employment earnings, which you can find on your payslip. But you’ll also need to pay Class 2 and Class 4 national insurance on your self-employment profits, which isn’t connected to your employment earnings.

Here are the current rates:

 2020/20212019/2020
Small profits threshold – no NICs below this threshold£6,475£6,365
Class 2 National Insurance£3.05 per week£3.00 per week
 2020/20212019/2020
Small profits threshold – no NICs below this threshold£9,501£8,632
Class 4 National Insurance 9%£50,000£50,000
Class 4 National Insurance 2%over £50,000over £50,000

Following on from the example above, we can ignore your employment earnings of £25,000 for the purposes of calculating Class 2 and Class 4 National Insurance and just calculate it on the £20,000 business profits. You’ll pay:

  • Class 2 national insurance £158.60 (£3.05 x 52 weeks)
  • Class 4 national insurance £945.00 (£20,000 – £9,501 x 9%)

When you are employed and self-employed you pay three types of national insurance – Class 1, Class 2 and Class 4. You can apply to reduce your Class 4 national insurance payments under the rules of the HMRC Annual Maximum but this is for individuals with significant earnings.

How to Declare Your Self-Employment Earnings

Once you’re registered as self-employed you’ll need to follow the rules of self-assessment to declare your income. That means you need to submit a tax return once a year by 31 January, summarising your earnings for the previous tax year.

A tax year runs from 6 April to 5 April, so your tax return due by 31 January 2020 summarises all your income between 6 April 2018 to 5 April 2019.

When it comes to filling in your tax return online, you’ll also need to delcare ALL your earnings. That means if you are employed and self-employed you’ll need to fill in two sections:

  • Employment section with details of your employer, gross income and tax deducted
  • Self-employment section with details about your business, income and expenses

You’ll also need to fill out more sections if you receive other types of taxable income like rental income and dividends.

How to Fill In Your Tax Return Online

About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.