Am I employed, self-employed, or both?

Am I employed, self-employed, or both?

Whether you are employed, self-employed, or both will make a difference to the amount of Income Tax and National Insurance contributions (NIC) you must pay, as well as how you pay. You need to know which of these apply to you so that you can comply with your tax obligations and claim tax reliefs available to you.

Your employment status is critical when it comes to tax. When you’re employed i.e., you work for an employer on a permanent basis, you are taxed on a system known as (PAYE). An employer can be a person or a company.

PAYE stands for Pay As You Earn. It is the system for collecting tax from your earnings or pensions during the tax year. The tax year begins on 6 April in the year and ends on 5 April in the following year.

This means that the Income Tax and National Insurance contributions you owe are deducted from your wages by your employer before you are paid.

If you start working for yourself, you are classed as a sole trader. This means you are self-employed – even if you haven’t yet told HM Revenue and Customs (HMRC).

A person is self-employed if they run their business for themselves and take responsibility for its success or failure.

When you are self-employed, the system is different. You don’t have an employer to deduct the Income taxes and National Insurance you owe automatically so the responsibility is on you to sort it yourself. You declare your untaxed income and pay tax via a self-assessment tax return.

Someone can be both employed and self-employed at the same time, for example, if they work for an employer during the day and run their own business in the evenings.

But where does that leave those who are employed and have freelance commitments, or their own side business? From the HMRC point of view, these people are seen as being both employed and self-employed.

Simply put, you are taxed both automatically (PAYE), and manually via a self-assessment tax return.

Do I have to pay more tax if I have a side business?

Not necessarily.

Essentially, having a side business won’t affect the way you are taxed. You won’t be taxed at a higher rate. Like earning money from rental income outside your employment, all your earnings are added together at the end of the tax year. You are taxed at a rate that’s based on the total amount.

Do I need to pay tax on my side business?

Essentially, yes – though if you earn under £1,000 in one tax year, this is not considered taxable, and you won’t have to register for self-assessment.

There are two special tax allowances – the trading allowance and the property allowance for property income for those who let out rooms or homes. Both let you earn up to £1,000 (gross, before expenses) of trading or property income each financial tax year and not pay tax on this income.

Looking for help with tax returns, contact us and we will help you.