Yes definitely you can be employed and self-employed at the same time, it just means some of your income is taxed at source through PAYE and some will need to be declared on a Self Assessment Tax Return by you. To avoid overpaying tax and national insurance you must plan ahead, so it might be useful to ask an accountant to work it all out with you.
The total amount of tax and National Insurance (NI) contributions you pay is based on:
- Your gross salary from your employment;
- Any allowances and reliefs you get;
- Your profits from self-employment and any other income not already taxed at source.
Pay As You Earn (PAYE)
As an employee you pay income tax and Class 1 NI through Pay As You Earn (PAYE). Your employer makes the deductions “at source” before you get paid, and your pay slip will detail the deductions each time you’re paid. Your P60 will detail what you’ve paid over the year. You should keep this paperwork somewhere safe as you will probably need it.
Income from self-employment
For income from self-employed work you are responsible for filing a tax return to pay any income tax and NI due. It depends on your self-employed earnings whether you will pay Class 2 and Class 4 National Insurance contributions.
Let’s take an example. Rose is employed during the day by a film company and runs a small business sub-titling films in the evenings and at weekends.
From the film company Rose earned £18,000 in the tax year 2016‒17. Her employer deducted tax and Class 1 National Insurance (NI) contributions through PAYE.
The tax-free personal allowance for 2016‒17 was £11,000
Rose’s earnings were £18,000
She pays tax at 20% on everything above her personal threshold:
(£18,000 – £11,000 = £7,000)
Rose pays tax on £7,000 = £1,400
Class 1 NI (@ 12%) = £1,192.80
Her net income = £15,407.20
Rose’s P60 will detail what she paid in income tax and national insurance over the year, this will give her the information she needs to fill in on the Employment pages of her Self Assessment tax return.
From her self-employed work sub-titling films, Rose charges an hourly rate and invoices clients. Note that Rose also has a website and a few other expenses from running her business. Her profits from self-employment were £9,000 in the same tax year and she has worked out her expenses:
- Broadband (which she apportions personal/work)
- Phone (which she apportions personal/work)
- Web administrator for her website (paid annually, all business cost)
- Stationery (all business cost)
- Post (all business cost)
- Use of home-office (apportioned)
- Incidentals (which she checks are actually allowable expenses)
Note how Rose apportions her expenses between business and personal. Rose’s expenses against profit from freelance work amount to £1,500, which means her self-employed earnings net are £7,500.
On the same Return, rose will fill in the section for self-employed earnings:
- £9,000 gross income less £1,500 expenses
- Income tax and NI due on £7,500
- Class 2 NI contributions at flat rate of £2.85 a week on profits over £6,025 will probably not be due, but Rose should still check;
- She will not need to pay Class 4 NI on her profits on self-employed income as they do not exceed £8,164 (had Rose’s profits exceeded that amount she would have paid NI at 9%; or 2% on profits over £45,000).
- All Rose’s profits (£7,500) are taxed at 20 per cent = £1,500, as Rose had used up her tax-free personal allowance through PAYE.
There are two things Rose should do:
Apply to defer NI
If you are both employed and self-employed you may be able to “defer” some of your Class 2 and/or Class 4 NI contributions and pay what’s due when you know what you have actually earned from employment and self-employment over a tax year. This will mean you won’t pay too much tax or NI on your self-employed income.
You must apply to defer your contributions before the start of the tax year you want to defer. So if you wanted to defer contributions for the tax year 2017‒18, you should have done so before 5 April 2017. Each tax year that you want to defer contributions you must re-apply See HMRC and how to defer here.
Should you keep your personal allowance with your self employed income?
Would it be better for Rose had she kept her personal allowance with her self-employed income and paid tax each month on her whole salary? This is a question to ask an accountant, this is called tax planning, and it would definitely benefit Rose if she spoke to someone with the expertise to make sure she’s making the most from all of her income.