Are You A Freelance On The Side? Do You Know What Tax Should You Pay?

You are here:
< All Topics

It is a common belief that the words “employed” and “self-employed” are contradictory. However, in the HMRC division, there is a possibility that a person can be employed and self-employed simultaneously. In reality, it is even a typical scenario. Can this affect your freelance tax liability?

If you are working for yourself in order to earn some extra money aside from your main job, then here are some of the essential information that you need to know. Learn about your expected self-employed tax and National Insurance and how are you going to pay them.

There are different reasons why some people choose to be employed and self-employed at the same time. For some people, they want to earn some extra money. While for others, they want to obtain some entrepreneurial skills. Most small businesses are created by people who are working full-time or part-time. Regardless of what the reason is, keep in mind that there are some tax obligations that you need to think about.

As a Sole Trader Freelancer, How Much Should I Pay For My Income Tax?

Take note that the figures that we use on our example are entirely based on the rates and thresholds issued by HMRC for the 2020/21 tax year. Typically, your income tax will be based on your total earnings. Therefore, you will have to pay tax on earnings which are over the Personal Allowance. This will be applied to all your income both from employment and self-employment profits. Later on, we will be discussing the difference between income and profits.

If you have huge earnings due to the addition of your sole trader profits, then it is possible that you can reach the higher tax band. When this happens, you will have to pay a higher rate. For instance, for the 2020/21 tax year, you have earned an income of £35,000 from your employer and £20,000 from your sole trade profits, then your total earnings will be £55,000. After deducting your Personal Allowance of £12,500, your total taxable income would be £42,500.

With a basic rate of 20%, your income tax payment will be £7,500. For the higher rate of 40%, you will have an income tax payment of £2,000. Therefore, your total income tax payment will be £9,500. Take note that these income tax rates do not apply for Scottish residents.

For all your income that is over your personal allowance, you will need to pay an income tax of 20% provided that they fall under the upper limit of the basic rate, for the 2020/21 tax year it will be £37,500.

On the other hand, for all your income that is over the basic rate limit, you’ll need to pay an income tax rate of 40% until such time that you have reached the higher rate limit, for the 2020/21 tax year the amount is £100,000. Based on our example above, you need to pay a tax rate of 40% for the earnings of £5,000.

When you are preparing your annual Self Assessment tax return, you’ll have to reveal the tax that you have already paid from your employer. In the example above, the income of £35,000 from the employer has already been taxed through PAYE. Therefore, HMRC is aware that part of your total income has already been taxed.

With regards to the profits that you’ve earned from being self-employed, which is £20,000 in this example, it will be verified by HMRC once you have submitted your Self Assessment.

What About National Insurance?

There are no changes on the National Insurance that you’ve paid for your earnings from your employer. However, it is quite different when it comes to the profits that you’ve earned from being self-employed.

First of all, if your self-employed profits are more than £6,475, then you are required to pay a flat rate of £3.05 weekly. Also referred to as Class 2 National Insurance. Class 1 National Insurance is typically paid using PAYE through your employer. However, the payment for Class 2 goes directly to HMRC via direct debit. If you have not yet registered, then you have to register online at Gov.uk.

If you are doing fine, then you have the option to pay Class 4 National Insurance. For self-employed profits that are between £8,632 and £50,000, the rate is 9% and 2% for self-employed profits that is over £50,000.

Class 4 National Insurance contributions are similar to your Income Tax, the amount will be computed based on your Self Assessment tax return. Using the same figures in the example above, we will show you how this works.

The self-employed profits are £20,000, for the Class 2 National Insurance, which is £3.05 each week multiplied by 52 weeks, the total amount is £158.60. For the Class 4 National Insurance, the rate is 9% for self-employed profits between £9,500 and £50,000. Since the profit is only £20,000, so we will compute 9% of £10,500, the amount is £945.00. Therefore, the total National Insurance payment would be £1,103.60.

Also, keep in mind that you also need to pay your Class 1 National Insurance from your employer through PAYE deductions. This is for your income from your employment. For more information on this, you can visit the gov.uk website.

What Is The Difference Between Sole Trader And Limited Company?

If you are self-employed, then you have the option to become a sole trader, or perhaps create your own limited company. The only difference is if you choose to become a sole trader, then you are entirely responsible for your business. For instance, you are fully responsible for all your business activities including debts.

On the other hand, if you choose to create your own limited company, then there is a separate legal entity, so you will not be personally responsible. Nevertheless, you will have certain legal and statutory responsibilities that you need to perform since you are the director of your limited company. It also has some tax implications.

What About Expenses?

One of the greatest advantages of registering yourself as self-employed and choosing to become a sole trader is that you can deduct your business expenses from your earnings. Your tax payments will only be based on your self-employed profits.

But when it comes to limited companies, there is a similar circumstance. This happens when the Corporation Tax is only based on company profits after all the allowable expenses have been deducted. This includes pension contributions, salaries, travel expenses as well as subsistence costs. However, it is difficult to identify what is considered an allowable expense and claiming is a bit complicated as well. The most important thing to remember is that anything you claim as a business expense should be solely for business use only.

When Should I Tell HMRC?

Although it is not necessary that you have to tell your employer but you have to inform HMRC. In fact, HMRC suggests that you should notify them as soon as you begin transacting from your new business.

You are required to register your new business with HMRC if your income as a self-employed sole trader goes beyond £1,000 within a tax year. If you are already working as a full-time employee, then this will occur after you have received your first earnings from being self-employed.

After you obtain earnings of more than £1,000, you need to register for Self Assessment until October 5th after the tax year ends. If you want to avoid the risk of paying a fine, then you have to inform HMRC. If you want to let them know, then you can use this form on HMRC’s site.

On the other hand, if it is unlikely that you will be earning more than £1,000, then there is no need for you to file a Self Assessment. This is because HMRC has implemented the £1,000 trading allowance to eliminate the need for filing a return in case this situation arises.

Will My Employer Find Out?

Most often, not informing your employer won’t be an issue. It’s fine if you don’t want your employer to know that you are working on the side. However, you should be careful since your employment contract might restrict you from taking on outside jobs, most especially if it is a competition with your present employer.

With regards to your tax obligations, HMRC won’t reveal them to your employer in case you have registered as self-employed. But keep in mind that if you form your own limited company, then your company details can be seen by the public through Companies House. It is possible that your employer could discover about your business this way.

We do not actually recommend that you would mislead your employer. Although it is possible that you can start working on the side without revealing it. Just keep in mind that you are doing this on your own risk.

Table of Contents