Has lockdown got you considering your working options and whether a career in freelancing or contracting might be your next great move? If it’s something you’re considering, but you’ve still got a foot in permanent employment, then you’ll need to have an idea of what your tax responsibilities are and how much you can expect to pay.
In this blog we explore just that, and help you to stay on the right side of the taxman.
Have you taken the leap into freelancing or contracting during the pandemic?
You’re not alone! In 2020 the Office for National Statistics (ONS) revealed that a record number of half a million new businesses were set up during the year. A survey by Enterprise Nation also discovered that one-in-five UK adults have a desire to start their own business one day, with that figure increasing to one-in-three (34%) amongst those aged 18-34.
So where do you currently sit within these figures, and does freelancing or contracting offer you the chance to dip your toe into the world of self-employment? It will give you the chance to explore what a career in freelancing or contracting could offer you, whilst maintaining the security of your permanent employment role at the same time.
How much tax can you expect to pay when working and freelancing or contracting at the same time?
The total amount of income tax you’re expected to pay is calculated on your total earning, so your combined income from both your permanent employment and your freelancing or contracting income. Any earnings above your Personal Allowance are then taxed accordingly. Bear in mind that if any income from your freelancing or contracting work pushes you into the higher rate tax band, you’ll have to pay the higher rate.
The following example shows you the tax you’d be expected to pay, based on a £35,000 pa salary as an employee, and an additional £20,000 pa freelancing or contracting:
Tax year 2021/22
Employer income: £35,000
Freelancing / contracting profits: £20,000
Total income: £55,000
Personal Allowance: £12,570
Total taxable income: £42,430 (£55,000 – £12,570 = £42,430)
Income Tax paid at basic rate (20%): £7,540
Income Tax paid at higher rate (40%): £1,892
Total Income Tax paid: £9,432
(These rates are based on the published rates and thresholds for the 2021/22 tax year from HMRC).
You’ll pay 20% Income Tax on any earnings above your Personal Allowance (£12,570) and below the upper limit of the basic rate (£37,700) for the 2021/22 tax year.
You’ll pay 40% Income Tax on any earning above the basic rate limit (£37,700) until you reach the higher rate limit (£100,000).
So for the above example you’ll pay 40% Income Tax on £5,000 in the 2021/22 tax year.
How do you let the taxman know?
When you complete your self-assessment tax return, you’ll be required disclose the tax you’ve already paid from your employer (£35,000 will have already been taxed under PAYE in the terms of your employment). HMRC will already be aware of this and what tax you’ve paid through PAYE.
Any self-employed profits will need to be disclosed on your self-assessment, including the amount of tax due. Your accountant will be able to assist you with this.
What about National Insurance?
The amount of National Insurance you pay from your permanent employment won’t be any different in this example, but it will be different for your freelance profits. Should you self-employed profits exceed £6,475 you’ll have to pay Class 2 National Insurance, which is a flat rate of £3.05 per week.
Class 2 is paid via direct debit directly to HMRC, whereas Class 1 is paid directly from your employer through PAYE to HMRC.
If your freelancing or contracting profits fall between £9,500 and £50,270 you’ll also need to pay Class 4 National Insurance. This is a 9% charge for profits up to £50,270, and 2% for profits which exceed this limit.
Your Income Tax Class 4 National Insurance Contribution is calculated on your self-assessment tax return. The below example uses exactly the same figures as the previous one, to demonstrate how NIC works:
Tax year 2021/22
Profit from freelancing / self-employment: £20,000
Class 2 NIC (52 weeks @£3.05 per week): £158.60
Class 4 NIC (9% rate on profits between £9,568 and £50,270): £938.88
Total NIC paid: £1,097.48
What do you need to let HMRC know?
Whereas you don’t need to let your employer know about your freelancing or contracting side-gig right away, you will need to let HMRC know ASAP. If your self-employed earnings as a freelancer, sole trader, etc exceed £1,000 you are also legally required to inform HMRC.
Whilst your tax affairs are yours to keep confidential, you may consider informing your employer to ensure you’re not in breach of your contract. Do be aware also that should you decide to form your own Limited Company, your personal details will become public on Companies House, to which your employer will have access to at any time.
How can Aardvark Accounting help?
Here at Aardvark Accounting we work with freelancers and contractors at every stage of their career, whether they’re just starting out and have a foot in both their permanent career and new venture, or if they’ve decided to take the full leap by leaving permanent behind. We can help no matter what stage you’re at. Why not take a look at the accounting packages we offer, or get in touch for more advice on getting started in your new exciting career!