Self employment, freelancing, contracting, consulting and the gig economy are all very different ways of earning money. An increasing number of people are choosing to supplement their full time job with a side hustle, or working two part time jobs instead of one full time, long term career. Some people like the variety, others are in a position of financial necessity.
But what does this mean for your tax position? It’s really important to look after your relationship with HMRC by understanding your tax responsibilities and fulfilling your liabilities.
1.Money you don’t know is considered ‘income’
Lots of taxpayers in full time employment make a ’bit of cash on the side’ with assorted projects. Some believing that, as they’re paying tax on their job earnings, this money doesn’t count. Unfortunately, HMRC doesn’t see it that way. The amount of income tax you owe is based on all of your taxable earnings, no matter where they come from.
And if you get caught out, the least you’ll owe is back taxes. There might be fines and even accusations of deliberate tax evasion, in a worst case scenario.
Here are a couple of common examples of extra income that you should be declaring to HMRC:
- If you own and let property, you owe tax on that rental income.
- If you earn over £1,000 in a year on a side hustle, you need to declare it as earnings. This could be selling spare time craft items on ebay. Or buying and renovating antiques to sell at craft fairs.
Your first priority is to work out if anything you do outside your main employment needs to be declared to HMRC.
2.PAYE and self assessment
If you’ve always worked for an employer, you’re used to your tax being taken off your salary and paid to HMRC before you even see it. The self assessment system is the way you pay tax on any other income. You need to be especially careful when you are involved in both tax systems.
Pay As You Earn (PAYE) is exactly what it says, you pay the tax on your actual monthly earnings. The self assessment system involves paying tax on the previous tax year’s earnings. For example, earnings in the 2019-20 tax year must be declared on a self assessment tax return and paid by 31st January 2021.
After one filing of a return, you get a payment on account estimated amount to pay half way through the year. The idea is to split your tax bill in two, instead of having a larger sum to pay all at once. This deadline is always 31st July and the final settlement of the bill for that year is always 31st January. What’s tricky about this, is that it’s an estimated figure, not based on your actual earnings. Often adjustments either way have to be made.
It’s not all bad news…
A good thing about filing a self assessment tax return for the first time is that it encourages you to consider all the tax reliefs and allowances you might be entitled to. There are a whole range of them and they apply to all taxpayers, not just the self employed.
In our experience, many employed people don’t even know about the ones that apply to them, much less the procedure for claiming. Things like, washing uniform, mileage and tools are all common tax reliefs that people never claim. Shame to leave your money in The Treasury’s bank account. You claim a tax rebate as part of the self assessment tax return process.
3.How more than one PAYE job can mess up your tax code
If you have more than one employed job, where you are paid through PAYE, you need to keep a watchful eye on your tax code.
It can seem safer to have two (or more) part time jobs as an employee. We’ve got fair employment laws in the UK that make sure you’re paid fairly and in no danger at work. For example:
- Health and Safety regulations to keep you physically safe
- Diversity and Inclusion laws to keep you safe from discrimination
- Limit on the number of hours you are allowed to work in one week
- Personal Allowance which means you can earn up to that amount without paying any income tax
- All employers must pay the National Minimum Wage or National Living Wage to all employees over the age of 25
Tax codes are HMRC’s way of telling your employer what to deduct, Each part of it means something. For example, the number represents the Personal Allowance you are entitled to.
The most common 2019-20 tax code was 1250L. The 1250 represents that year’s Personal Allowance amount of £12,500. So, you could earn £12,500 before paying any tax. The letters all mean something different too. In this case, the L means that you have no special circumstances that are relevant.
Having more than one PAYE job means that you will have two tax codes. Depending on how this is all administered, you can end up paying the wrong tax bill. And, despite HMRC issuing the codes, it is your responsibility to check that you are paying the correct amount of tax.
Your Personal Allowance amount can usually only be applied to one tax code, so it’s usually best to put that to your highest paying job. Otherwise you can miss out on some of that tax free amount.
This is different if your jobs do not exceed the Personal Allowance amount when they are added together. At this point, you can get help from HMRC to split your PA across the two incomes. Just be warned that you need to work out what’s best for you. Splitting it may not be the best option if your work rate fluctuates.
Most people with two PAYE jobs apply their Personal Allowance amount to their highest paying job and pay the Basic Rate of tax on all of their second job. This is the fairest way to make the most of your PA.
If you go into the higher rate tax bracket, you need to be certain that you’re not paying too little tax. No one wants a surprise extra tax bill. This means really digging into your tax codes and getting HMRC to change them if they’re incorrect.
4.Benefits and tax
Employment and benefits are always a tricky balancing act. Many benefits are reduced once you’re earning and if you’re in multiple jobs and some of them are taxable. This is just another element to add to the overall equation. Universal Credit and Tax Credits can both go down if you earn over certain amounts. For example you may be eligible for the Work Allowance. This means that you can currently earn up to £287 (with Housing Benefit) or £503 (without Housing Benefit) before you start losing benefits. This only applies if you have limiting circumstances or are looking after children. But after you go over this amount, your benefit goes down by 63p for every £1 you earn.
The only thing that’s crystal clear about tax is that there are a lot of regulations. Some apply to you every day, while others will never be relevant to your circumstances. People are understandably wary of using HMRC’s systems, like self assessment, because there are looming penalties just for making mistakes.
You don’t have to figure things out by yourself. We’re at the other end of a phone, or contact form. And HMRC genuinely will help you. Their job is to administer the regulations in order to collect everyone’s tax. They don’t’ want people over paying or not get their tax rebates (it unbalances their books). But you need to play your part and take full responsibility for being totally tax efficient.
