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As more and more people turn to multiple sources of income for a living, staying in control of your taxes is vital. At MoneyMagpie, we've put together a guide that includes what you need to know about second jobs and sideline taxes, and who needs to submit a self-assessment.
- What are sole proprietorships?
- Side hustle taxes
- Second jobs and taxes
- What is a self-assessment?
- Do I have to state services in a tax return?
- Payments on account
- More useful reading
What are sole proprietorships?
A sole proprietorship is someone who is self-employed, runs his own business and is entitled to keep all profits after tax is paid, but is also liable for all losses and debts of the business. Once you start working for yourself, you will be classified as a sole proprietorship, which means you will be self-employed even if you haven’t told HMRC.
Self-employed people choose between sole proprietorship and limited liability company status for their business. Sole proprietorships are typically freelancers or contractors, while anyone planning to grow to employ others must register as a Ltd company. A sole proprietorship (also known as a freelancer or contractor) may employ other people, but usually chooses to work as a limited company if that is the case.
You can be busy and self-employed at the same time. There are no restrictions on how much work you can do or how much you can earn. As long as you make sure you are correctly reporting your income and paying the correct tax, you will be pretty good.
You must set up as a sole proprietorship if any of the following applies to you:
- Earned more than £ 1,000 self-employment in one tax year
- You have proof of self-employment (e.g. invoices).
- You want to make voluntary payments for class 2 social security in order to be eligible for benefits.
Set up as a sole proprietorship
In order to establish yourself as a sole proprietorship, you must inform HMRC that you will be paying tax through a self assessment by registering here.
You need to:
- Keep a record of your business sales, bills, and expenses.
- Submit a self-assessment tax return at the end of each tax year.
- Pay income tax and national insurance contributions for classes 2 and 4.
- You will also need to register for VAT if your sales are over £ 85,000. Even if this is not the case, you can voluntarily register if it is suitable for your company.
Side hustle taxes
Part-time jobs and freelance jobs are increasingly a popular way for people to earn extra income outside of their main working hours. However, navigating the control side of extra work can be more difficult. In contrast to any PAYE employment, the income from a secondary business is untaxed and must be reported to the HMRC. Failure to do so could result in fines and interest for late payments.
With so many people on vacation or working fewer hours, extra income is an attractive option. However, it is very important that you register as a sole proprietorship even if you are on vacation or otherwise busy. HMRC takes into account the income from both jobs to ensure you are paying the correct amount of tax.
Anyone can receive an additional £ 1,000 income before reporting it to HMRC. You will need to file a tax return once you have earned more than £ 1,000 in the tax year (April 6th – April 5th). The amount of tax and social security contributions you then owe will depend on how much you earn as a freelancer and how much you get paid in your full-time job. If your additional source of income pushes your total income into the higher tax rate band, you will have to pay the higher tax rate on that income.
Example for the tax year 2020/21
- Miss. X makes £ 40,000 working for an employer and has made a profit of £ 14,000 as a sole proprietorship, which equates to an annual income of £ 54,000.
- Her personal allowance is £ 12,500 so her total taxable income is £ 41,500.
- Miss. X pays 20% of her taxable income (up to £ 50,000) which is equal to £ 37,500 which means she will pay £ 7,500 in tax.
- Since the receipts of Miss. X lead them into the higher interest band, they have to pay 40% on GBP 4,000, which is equivalent to GBP 1,600.
- Overall, Miss. X pay £ 9,100 in taxes for the year.
Second jobs and taxes
Most people take a second job to make extra money or to take the first steps to run their own business or become self-employed. However, you need to be careful when doing multiple jobs and understand how it will affect you and the tax you pay.
Everyone has the right to earn a certain amount each year without having to pay taxes, known as your personal allowance. This is currently £ 12,500 in the 2020/21 tax year. If you have two jobs and neither income is over £ 12,500, your personal allowance can be split between them. For example, if you make £ 9,000 in your first job and £ 6,000 in your second, you can ask HMRC to transfer the remaining £ 3,500 of personal allowance to your second job. However, you should only ask for this if the income from each job is predictable and consistent. Otherwise, you could underpay taxes and owe money at the end of the tax year. If you don't ask for your personal allowance to be split and end up being paid too much, you can file a refund at the end of the tax year.
In the event that all of your personal allowance is used up in your first job, everything you earn in your second job will be taxed at the appropriate tax rate. If the combined income from your work is less than £ 50,000, this is a 20% principle. If that income exceeds £ 50,000, any income over £ 50,000 will be taxed at the higher rate of 40%.
What is a self-assessment?
A self assessment is a standard tax return form. Anyone who earns additional income that has not yet been taxed must complete one at the end of each tax year (April 5th). The majority of people in the UK are paid through PAYE employment that deducts tax and social security contributions for you. However, people and companies with other incomes must report this at the end of each tax year by filing a tax return for self-assessment.
Even if you are not self-employed and receive an income other than your PAYE work, you have to fill out a tax return every year. For example, if you earn an income from renting a room in your home or property for sale, this must also be reported.
For people who need to file a tax return for the first time, you need to register here. You can also estimate the amount of your income tax using the Gov calculator.
You need to ensure that your tax return is filed before the deadline or you may incur fines. Deadlines vary depending on how you are filing them and whether this is your first time filing a tax return. Here you can find the current deadlines for self-assessments.
Who has to send a tax return?
Even if you make a little extra money selling second-hand items online but don't officially consider it part of your income, you may still need to file a tax return. You must send one if in the last tax year you:
- Self employed as a sole proprietor and earns over £ 1,000
- A partner in a business partnership
Usually you don't have to send a return if your only income comes from your wages or your pension. However, you may need to send one if you have other untaxed income, such as
- Money from renting a property
- Tips and commission
- Income from savings, investments and dividends
- Foreign income
The golden rule is if you have any doubts about filing a tax return, contact HMRC. Knowing what to pay now is much better than receiving a surprise tax invoice later!
Receive benefits and be self-employed
One thing that is often not clear to the self-employed is that you may not need to report certain benefits on your tax return.
This is really important to know – especially since there are record numbers of people receiving universal loans due to Covid-19. Many people laid off by the pandemic are seeking universal loans while starting their own businesses. Juggling sideline taxes, vacation pay, or tax on layoff packages, as well as getting perks after your reduced income make it very confusing. You do not need to include universal credit income in your self-assessment.
Some other benefits may be required to be declared on the tax return. However, the tax return itself asks if you will receive it. Including benefits as part of your annual income can have a significant impact on the amount of tax you have to pay. So make sure you don't include your universal loan income.
Payments on account
If you're juggling a part-time job alongside your PAYE job, it's easy to believe that taxes are dealt with in the same tax year in which they were earned. Unfortunately, this is not the case with the self-employed!
Ancillary taxes could earn you a bigger bill than expected thanks to the payment on account. This is where your self employment tax is calculated for the year … and then HMRC decides you will earn this for the next year too. So you have to pay the tax due for the entire year plus the tax for the following year. These PoA are split with 50% due in July and 50% the following January. The goal behind this is to ensure that freelancers are always one step ahead of their tax burdens. However, it is difficult to navigate – especially since many sole proprietorships have fluctuating incomes.
Read more about payments on account here.
More useful reading
For more help and guidance on your taxes, see the following articles: