Tax rates on incomes are applied after consideration of one’s Personal Allowance in the UK. Through his blog post, we will explore how much tax applies to the incomes of individuals who are self-employed as well as working for an employer. We will also discuss in detail how income tax applies to dual incomes by analysing different situations.
How Much Tax Do I Pay If I Am Self Employed And Working For An Employer?
If you are self-employed as well as working for an employer, both your incomes will be taxed separately. You will be paying tax on your salaried employment through the PAYE system where tax is automatically deducted by the employer before wages are handed over to employees. In the case of your self-employment, you will be required to file a tax return by declaring your trading profits through self-assessment at the end of each tax term.
Below are details of tax rates based on income brackets which will be applied to your salried income:
- If your income is between £0 and £12,570, you will pay zero income tax
- If your income is between £12,571 and £50,270, you will pay a 20% tax
- If your income is between £50,271 and £150,000, you will pay a 40% tax
- If your income is over £150,000, you will pay a 45% tax
However, in the case of trading profits being assessed through self assessment, your income tax rate will apply as follows:
|Trading Profit||Income Tax Band||Tax To Be Paid|
|Up to £12,500||0%||No Income Tax on first £12,500|
|Between £12,501 and £50,000||20%||20% Income Tax on your next £37,500|
|Between £50,001 and £150,000||40%||40% on the final £2,000|
|Over £150,000||45%||No Income Tax paid at this rate|
Before you start with your self-assessment tax returns, you must make sure that you have the following documents available:
- your National Insurance number
- your ten-digit Unique Taxpayer Reference (UTR)
- your Government Gateway ID
- details of your untaxed income from the previous tax year (this includes income from rental income, dividends from shares, interest on savings, capital gains)
- expense details related to self-employment or partnership status (receipts/invoices/bank statements)
- tax-free/relieved charity contributions
- P60 or other records with details of your income and paid taxes (if any)
- pension income and pension contributions
- redundancy payments or employee benefits
Do I Have To File A Tax Return?
You don’t have to file a tax return if you are a salaried employee as your tax is deducted by your employer before your salary is paid; using the tax code assigned by HMRC. However, you must file a tax return if you fall into any of the below categories:
- You are self-employed and your income was more than £1,000
- You earn through renting out property and your income was more than £2,500
- You earned through commission or tips in excess of £2,500
- You earn through savings or investments and your income was £10,000 or more
- You have sold a property or shares and have earned profits on them (Capital Gains Tax will apply in this case)
- You are registered as a director of a profit-making organisation
- The joint income that you or your partner have earned was in excess of £50,000 and you claim Child Benefit
- You have earnings from outside the UK
- You live abroad but you have earnings in the UK
- The total amount of your taxable income was over £100,000
- You are a trustee of a trust or a registered pension scheme
- The State Pension you received during the tax term was your only source of income and was in excess of your personal allowance
- HMRC issued you a P800 stating that you didn’t pay enough tax in the previous tax term
How Much Tax Will You Pay On A Second Job?
The tax that you pay on a second job will depend on a number of factors. However, generally speaking, your second job is usually assigned a BR (Basic Rate) tax code which indicates that there is a 20 per cent tax due on your income.
Your second job is usually considered to be the one that provides a lower income than the first one and there is no consideration for Personal Allowance since it has already been accounted for. The reason is that the HMRC divides your total income by sources to calculate the amount of tax that is due on your cumulative income.
Since you get Personal Allowance once (it does not apply to each individual source of income), it may be in your own interest to have it applied to your main job and not the second one. However, if someone works two jobs and their cumulative income is less than the Personal Allowance amount of £12,750, they can have it spilt across both incomes. Sometimes a second job may increase your tax bracket which leads to a higher tax deduction on your income with an insignificant impact on your take-home salary.
To avoid being overtaxed or undertaxed (with tax arrears due at the end of the term) due to a second job, it is advisable to follow the below instructions:
- When you start a second job you must make sure that you get a Starter For or P46 from your new employer. This form is used to update your employment details at the HMRC.
- Confirm the tax codes assigned to both of your jobs. Your main job is usually assigned a 125L tax code for 2021-2022; while your second job will be assigned a BR, D0 or D1 tax code.
What Does The D0 Tax Code Mean For Second Incomes?
The D0 tax code means that the individual will be liable to pay income tax at a higher rate of 40 per cent for all their incomes. It is commonly used in cases where individuals have more than one job or pension. The HMRC issues this tax code to individuals if all of their tax-free allowances have been used against another source of income.
Individuals are assigned a D0 tax code because (a) they have multiple sources of income and (b) calculations predict that their second source of income will cause their total combined gross earnings to be between £37,701 and £150,000. This is only after any tax-free allowance has been deducted.
Tax codes are a combination of letters and numbers that determine the amount of income tax due on an individual. For instance, 1257L (currently the most common 2021-22 tax code in the UK) refers to the new Personal Allowance rate for 2021-22, which is £12,570 and the letter “L” indicates that the individual is entitled to this amount of tax-free income. Any taxes that are to be charged will be above additional amounts beyond this figure.
How Are Tax Codes Assigned?
The following steps are followed by the authorities while assigning tax codes:
- Step 1: Your tax allowances are calculated. In most cases, this is an individual’s personal allowance added to any other allowances and job expenses.
- Step 2: Your deductions are calculated. These are incomes for which tax has not been paid and may include any part-time work or certain state benefits.
- Step 3: The deductions are subtracted from the tax allowances. The result is your pre-tax income. If this amount equals personal allowance, your income remains tax-free.
If you don’t know your tax code, you can find it through any of the below-listed documents:
- P45 form
- PAYE coding notice
- Pension advice slip
- HMRC website
Can You Be Registered As Self-Employed But Have No Income?
Yes, you can be registered as self-employed but have no income. This usually happens when the earnings from the business are being spent to pay for its expenses which does not leave any income or profit for the owner. In this case, you, as the owner, will also not be liable to pay income tax or contribute towards national insurance.
If your earnings are below £1,000 in a tax year, you do not need to be registered as self-employed. In such a case, you will also not be required to declare your income to the HMRC as no income tax or national insurance contributions will be deducted from your earnings.
Once you do start making a profit as a self-employed individual, you will have to file a self-assessment based tax return and contribute towards national insurance. Your trading profits will be taxed on the same basis as salaried employees. This means that you will not be taxed for the initial £12,750 of your profits as it will count towards your Personal Allowance and the rate of tax deduction will increase as your profits do.
After an elaborate discussion in this article, we have come to the conclusion that when someone is self-employed as well as working for an employer, both their incomes are taxable. However, their income from a salaried job will be considered for tax deduction under the PAYE system while they will have to file a tax return through the self-assessment system for their trading profits earned through self-employment.
FAQs: How Much Tax Do I Pay If I Am Self Employed And Working For An Employer?
Can you work both PAYE and be self-employed?
Yes, you can work both PAYE and be self-empluyed. In this case, you will be taxed through the source for your salaried employees and will file a tax return for your self-employment business.
Do I have to pay Class 2 NIC if I am employed and self-employed?
In case you are employed and self-employed at the same time, you will be required to pay Class 1 NIC on your employed income and Class 2/4 NIC on your self-employed income.
How much can you earn before paying tax?
The standard Personal Allowance in the UK is currently £12,750. This means that this amount of your income is tax-free.
What is the difference between self-employed and independent contractors?
Being self-employed means working for your own self rather than anyone else. Usually, self-employed individuals are registered as sole traders. Being an independent contractor indicates that you are self-employed and not working for a company.
Do I have to pay tax in my first year of self-employment UK?
Yes, you will be required to file a tax return by Jan 31 of the following year from when you started your business. This means that anyone who started a business in June 2021, will file for their tax returns in Jan 2023.