Are you thinking of starting up a new business alongside your current job? Starting a second job as self employed is a super common way to dip your toe into running a business. All with the security of your existing income.
Building up a business on the side is a great way to get started. You then have the ability to decide whether or not to make the transition to full time when all your hard work to build your income pays off.
It’s common because it’s actually a great way to test the waters and see if you like being in business for yourself. It isn’t for everyone, after all.
Amongst all of the stories of ‘side-hustles’ and passive income which we love, of course, we felt it important to explain a little about how the tax works.
What do I need to tell the tax people about my second job as self employed?
The main bit of admin related to this is understanding whether you need to do a self assessment tax return.
Firstly, you don’t need to tell HMRC if you sell less than £1000 a year. You might have heard this referred to as a ‘trading allowance’.
However, in some circumstances it is still good practice to do a tax return. For example, if you’ve made a loss, or want those extra earnings for mortgage purposes, submitting a tax return is still often worth it.
If you want (or need) to complete a tax return, you should tell HM Revenue & Customs HERE.
So how does the tax work for self employed people?
All of your tax gets dealt with inside that tax return. Think of it like a ‘bucket’ that captures everything.
In goes all of your earnings, including any profit from your new venture. The result? A tax bill. It takes into account any tax you’ve paid, say in your current job.
By profit, we mean:
Income – Tax deductible expenses = Profit.
What’s the deal with National Insurance?
In most cases you still have to pay this on your self employed income and in your job, depending on your income. If it’s a very small amount of self employed profit, you may not have to pay anything.
To recap, in your job you pay ‘Class 1’ NI. This is 12% over the first £9.5k a year (at time of writing). For technical reasons, it is actually possible to pay NI at less than this per year. This is due to the way it’s calculated each period, but let’s not get too deep here…
On the self employed bit, once you earn over around £6.5k a year you will pay a little ‘Class 2’ at around £3 a week.
If you earn over £9.5k in your self-employment you will pay 9% in ‘Class 4’ contributions.
What tax will I pay on my new ‘hustle’?
If your current job pays you more than £12,500 – your tax-free personal allowance at the time of writing – you will pay tax at either 20% or 40% on the self employed profit. The amount will depend on whether you are a higher rate (40%) or basic rate (20%) tax payer. If you earn less than £50k (time of recording) you are basic rate.
Any self-employed national insurance and tax due to be paid will be dealt with in the tax return and due by 31st January each year following the end of the tax year, the same date that you need to file your tax return by.
So for example, your earnings between 6th April 2020 – 5th April 2021 will be due by 31st January 2022.
How do I plan for tax bill?
We have another blog on this issue, but if you set aside 25% of your profit (presuming you earn under £50k), you won’t go far wrong.
For further reading, you can check out our Self Employed Start Up Guide HERE.
If you need help with setting up your business, please get in touch with the team – we’d love to help.
NB: We’ve used round numbers and approximates in this blog, because the rates change year on year.