Whilst making the leap to full-time freelancer is hugely exciting, it’s not always practical for everyone. Plenty thrive on the security of permanent employment (and the perk of a regular wage) or simply don’t want to give up a job they love and have worked hard for— meaning they choose to pursue a ‘side-hustle’ instead.
More of us than ever before are starting up these creative projects during spare evenings and weekends or going part-time to free up time for freelancing. Combining employment with freelancing can offer the best of both worlds but when it comes to dealing with the taxman, things get a little bit more complicated. Here’s everything you need to know about taxes when you’re employed and freelance…
Testing the waters
If you’re weighing up the pros and cons of starting a business on the side then the good news is that you might not have to pay tax from day one. You’ll most likely have used up all of the standard personal allowance (currently £11,850 for the current tax year) on your main job
but you can qualify for a £1000 tax-free allowance when self-employed—regardless of how much you earn in employment.
If you earn less than £1000 a year (note this is income, not profit) from your side job then you don’t currently need to declare these earnings to HMRC or pay tax on them. You’ll still need to keep your own records and it can be worth checking with HMRC as there are a few exceptions to the rule (more on these here).
You’ll need to be earning even more before you need to pay extra National Insurance on top of your 9-5. Class 2 N.I contributions (just under £3.00 a week) are required when your freelance profits (income minus expenses) hit £6,205 or more. Once they then hit £8,424, you’ll also need to pay Class 4 N.I contributions too (calculated as 9% of your profits over the threshold amount and up to £46,350, after which you’ll pay 2%). Again, both of these don’t depend on how much National Insurance you pay in your employment.
Whilst it’s always best to register with HMRC as soon as you start trading (it’s much less scary than it sounds we promise!), you do have some breathing space. “I always say to people looking to start freelancing – go and do it, follow your instinct and make some money first. Then when you’re sure it’s something you want and it’s going to work, speak to an accountant and set things in order,” explains Raj Dhokia, who runs Kona Seven-which specialises in accounting for creatives, freelancers and bloggers.
The very latest you can register with the taxman is by the 5th October in your second tax year. There’s no need to wait that long but it does allow you to test the waters to see how things go.
Paying tax on your freelance earnings
Other than the £1000 trading allowance, the same tax rules still apply when you’re self-employed.
When you send your tax return off each year, you’ll also need to enter your income and tax paid from your employment (this is easily found on your P60) which HMRC will then use to help calculate your tax band and amount owed.
Because these two figures work in conjunction, it is worth being aware that a self-employed income could well push you into the next tax bracket and see you owing a lot more tax than you’d anticipated. However, Chartered Accountant Michael Goodacre explains this might not be as bad as it sounds.
“The UK uses a marginal tax regime; meaning even if you cross into a higher tax band, you’ll only pay the higher rate on the marginal income. For example, say you earn £40,000 a year and pay the 20% rate. Earning an extra £10,000 a year from your side job will push you into the 40% band, but you’ll only pay 40% tax on the amount over the band. The band is currently £46,351 so you’d only end up paying 40% on £3,649 of your side job income, not the whole amount.”
Either way, it’s definitely worth keeping this in mind and preparing for it to ensure your venture makes financial sense. “For many in this situation, it can be better to start your side business as a limited company and you should discuss this with an accountant,” adds Raj.
Financial questions to consider
Once you’ve looked into the tax implications, there are a few other things to consider. Of course, the main one is to ensure your freelance work won’t hinder your employment—which could be the biggest financial disaster of all! “Check your current employment contract permits a side-job and if not, discuss it with your employer” advises Michael. Even if there’s no contractual issue, do think about how you’ll manage your time: could a freelance project hinder your focus, your earning potential and chances of promotion at work?
Are there any circumstances where it’s just not worth it? “You will still always be financially better off taking a side-job” adds Michael “but it’s still worth asking yourself whether you enjoy the work and how the average earnings you could achieve compares to your full-time job.”
It’s clear that freelancing around permanent employment can be incredibly rewarding—just make sure you do your research and add up the sums to ensure it’s the right move for you!