Are you feeling confused about your tax obligations as someone who is both self employed and employed? It’s not uncommon to find yourself in this situation and wonder how it all works. In simple terms, when it comes to income tax, all your income from various sources is added up and taxed together. However, special tax rates apply to certain types of income, such as dividends and bank interest. National Insurance, on the other hand, is charged separately for each source of income. It’s important to navigate these obligations correctly, so make sure to include all sources of income and tax deducted at source on your self-assessment return. With the right understanding and guidance, you can manage your tax obligations effectively.
Income Tax
Income Tax is charged on aggregate income, regardless of the source. This means that all your different sources of income are assessed together to determine your tax liability. Whether you earn income from employment, self-employment, rental properties, dividends, or bank interest, it is all considered when calculating your Income Tax.
There are special tax rates for dividends and bank interest within the Income Tax charge. The tax rates for the 2024/25 tax year are as follows:
- £0 to £12,570 – 0%
- £12,570 to £50,270 – 20% (Basic Rate Band)
- £50,270 to £125,140 – 40% (Higher Rate Band)
- Over £125,140 – 45% (Additional Rate Band)
It’s important to note that there is a personal allowance of £12,570 which is taxed at 0%. However, this personal allowance tapers out on incomes over £100,000 at a rate of £1 tapered deduction for each £2 of income over £100,000, ultimately creating a 60% marginal rate.
If you are employed, Income Tax may be deducted from your payslip through PAYE (Pay As You Earn). The amount deducted through PAYE is offset against your overall tax liability for the year when calculating the balance due or repayable.
Your tax code determines how much tax you pay if you are not in self-assessment. The accuracy of your tax code is important, but if you are in self-assessment, the tax code is less critical as it all comes together when you complete your self-assessment tax return. It’s common for the tax code to be incorrect when there are multiple income streams, but it typically sorts itself out when you are in self-assessment.
National Insurance
National Insurance (NI) is charged on each source of income, and there are different classes of NI for employed and self-employed individuals.
- Class 1 NI is paid on earnings from employment.
- Class 4 NI is paid on profits from self-employment.
- Class 2 NI is a voluntary payment made by self-employed individuals with low profits to maintain state pension access.
- Class 3 NI is also a voluntary payment that can be made to maintain state pension access, but only if you aren’t paying NI elsewhere.
As NI is charged on each source of income, it is calculated independently for employment and self-employment. Class 1 NI is deducted from your pay via PAYE, while Class 4 NI is calculated based on your self-employment income and collected through self-assessment.
If you are both self employed and employed and have income below the NI thresholds for both sources, you may want to consider making voluntary NI payments to protect your state pension access.
Self Assessment
Self Assessment is the process of aggregating your income from employment and self-employment and reporting it on your tax return. It is important to include all sources of income, as well as any tax deductions at source.
When completing your self-assessment, you’ll need to enter the following information:
- Business profits
- Jobs and employments
- Income from land and property
- Savings income
- Pension payments or income
- Capital gains
You will also enter any tax paid at source, which will be offset against your final tax liability. Self-assessment allows for more accurate reporting of all income and deductions, ensuring that your tax liability is calculated correctly.
Tax Code
Your tax code is relevant to employed individuals and determines how much tax you pay. For non-self-assessment taxpayers, the accuracy of the tax code is crucial. Your tax code is less important if you are in self-assessment, as HMRC will allocate your personal allowance against your tax liability.
Multiple income streams can often cause errors in the tax code, but it usually gets sorted out when you are in self-assessment. Self-employed individuals will go through the self-assessment process, which includes reporting all sources of income and calculating tax liability accordingly.