Can you be employed and self-employed at once? Understanding dual work status
Can you be employed and self-employed at the same time? Absolutely, and many are doing just that. In the following guide, we’ll walk you through how to balance a 9-to-5 job with your entrepreneurial pursuits while navigating the ins and outs of taxes, time management, and legal considerations.
Overview:
Understanding dual employment
Holding two jobs may seem daunting, but it’s becoming increasingly common. It’s perfectly legal to be both employed and self-employed at the same time. For instance, you might hold a traditional 9-to-5 job while also running your own business or freelancing in the evenings.
This combination of employment status can be a practical way to supplement your income or pursue a passion project while maintaining financial stability. However, wearing two work hats has its complexities.
Time management can be a challenge, with two sets of responsibilities to juggle. Furthermore, tax obligations can become more complicated when managing income from two sources. Let’s explore these considerations further in our next sections.
Understanding your responsibilities
When you’re both employed and self-employed, it’s important to understand your tax responsibilities. You’ll need to pay income tax on both your employment income and your self-employment income.
One benefit of being self-employed is the ability to include the deduction for self-employment in your tax code. This allows the tax to be paid over the year, rather than in a lump sum at the end of the tax year or through payments on account.
However, this is a choice you’ll need to make. You have the option to keep or remove the deduction for self-employment from your tax code. This decision will affect how you manage your taxes, so it’s key to understand how it works and what it means for your financial planning.
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Balancing taxes: How to manage Income Tax and National Insurance Contributions
When it comes to balancing taxes for dual work status, things can get a bit tricky. You must pay income tax on both your employment income and your self-employment income. Plus, when you register for self-employment, you need to anticipate making National Insurance Contributions and other payments towards your tax bill.
But don’t worry – with a bit of planning, it’s quite manageable. It’s advisable to set aside approximately 30% of your self-employed income for taxes, as many people often wonder how much tax they should prepare for. You should also consider making use of tax-advantaged savings accounts. These strategies can help you manage your Income Tax effectively.
Income Tax: Dual streams, one tax return
When you have dual income streams from employment and self-employment, you’ll need to declare both on a Self-Assessment tax return each year. This includes reporting your employment income, which is usually paid through the Pay As You Earn (PAYE) system by your employer.
Your tax liability is calculated by combining the income from both your employment and self-employment activities reported on your tax return. It’s important to pay tax and:
- Keep track of all your taxable income
- Complete your tax return accurately
- Remember that tax returns have deadlines – January 31st for online filing and October 31st for paper submissions – and late submissions can lead to penalties.
National Insurance: Understanding Class 4 and PAYE
National Insurance is another key aspect of taxes for dual employment. If you’re employed, your employer will deduct Class 1 National Insurance Contributions from your wages through the PAYE system, with tax deducted as well. However, if you’re self-employed, you’ll need to make Class 2 and Class 4 National Insurance Contributions directly to HMRC.
This highlights a key difference between being employed and self-employed: in the latter case, you’re essentially your own boss, and you don’t have the same rights and responsibilities as an employee when it comes to National Insurance contributions. It’s another factor to consider when navigating the complexities of dual employment.
Setting up your self employment: Registration and compliance
Decided to take the plunge and set yourself up as self-employed? Great! But before you get too carried away with your business plans, there are some administrative tasks to tackle. First of all, you’ll need to register as self-employed with HMRC. This is a legal requirement as soon as you start self-employment activities, and it’s crucial for keeping your tax affairs in order.
But registering is just the first step. Once you’re registered, you’ll need to maintain compliance with tax regulations. This includes completing a tax return each year, adhering to specific payment deadlines, and making biannual ‘payments on account’ towards your next tax bill.
Registering with HMRC: A step-by-step guide
So, how do you go about registering as self-employed? The process is quite straightforward. Here are the steps:
1.Create an HMRC online account.
2.Add ‘Self Assessment’ as a tax, choosing ‘Sole Trader’ as your business structure.
3. HMRC will then send you a Unique Taxpayer Reference (UTR) by post, along with an activation code for your account.
There are some important deadlines to note. HMRC requires self-employed registration by 5th October in the relevant tax year. And if you stop being self-employed, you need to inform HMRC to ensure you’re not expected to file a tax return for subsequent periods.
Compliance and record-keeping essentials
Once you’re registered as self-employed, it’s crucial to stay on top of your record-keeping. You’ll need to track all your:
- invoices
- business income records
- purchasing receipts
- bank transaction details
It’s also essential to keep separate records for private and business expenses.
You’re required to keep your records for at least five years following the January 31st deadline of the tax year in question. Financial management tools can assist you in handling your accounts and staying compliant with tax regulations.
If your self-employment income is small, you might be eligible for the trading allowance, which reduces the need for detailed record-keeping of expenses.
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The implications of employment law on your side hustle
Now that we’ve covered the tax law implications, let’s turn our attention to employment law. The laws that apply to you will depend on your employment status. If you’re self-employed, you’re generally considered your own boss and not covered by employment law.
However, the way HMRC and employment law view your employment status can differ. This discrepancy can impact your rights and tax obligations. It’s important to understand this to avoid potential penalties or loss of benefits.
Employee vs. contractor – Knowing your rights
The way you’re classified as a worker – whether as an employee or a contractor – can significantly affect your rights, entitlements, and tax obligations.
For instance, employees usually have clearly defined roles set by their employer, often with benefits like job security and training. On the other hand, contractors are hired for specific tasks and typically handle their own taxes and training.
If you’re self-employed, it’s important to understand that your rights and responsibilities are usually determined by the terms of the contract with your clients. This means you’ll need to be proactive in protecting your interests and ensuring fair treatment.
When employment contracts matter
If you’re considering starting a side business while still employed, it’s crucial to review your current employment contract first. Some contracts may contain clauses that could impact your ability to start a side business. For example, some contracts expressly prohibit secondary employment.
If you find any restrictive clauses, it’s important to understand your legal ground. You might need to negotiate with your current employer or seek legal advice. Being aware of these provisions can help you avoid potential legal consequences of job termination.
Financial planning for dual income streams
Managing dual income streams requires careful financial planning. This involves budgeting your earnings, setting financial priorities, and managing your savings and investments.
For instance, you’ll need to calculate your average monthly income from past or projected earnings and set aside money from each paycheck for bills and savings.
Financial planning also involves:
- Preparing for future income fluctuations
- Establishing an emergency fund to cover potential income drops
- Defining your savings targets to motivate you to stick to your budget and make wise financial decisions.
Budgeting your earnings
Budgeting effectively with dual income streams involves the following steps:
- Calculate your annual income from all sources.
- Determine your expenses as a percentage of this income.
- Prepare for future paychecks and ensure that you’re living within your means.
Having clear financial priorities and goals can also help you make informed decisions about your savings and expenditures. This is especially important if your self-employment income is variable, as it allows you to adjust your budget based on your income fluctuations.
Navigating specific scenarios: Contractors, limited companies, and trading allowances
Dual employment can take many forms, and the specifics of your situation can alter how you navigate your responsibilities. For example, you might be a contractor, run a limited company, or opt to utilise a trading allowance. Depending on your circumstances, different considerations apply.
Let’s dive into these specific scenarios and uncover how they influence your dual employment journey.
Contract work and self-employment
If you’re a contractor, your tax obligations and employment status might differ depending on your work arrangements and industry. For instance, contractors in the construction industry are subject to specific tax compliance requirements under the Construction Industry Scheme (CIS).
Regardless of your industry, if you’re both employed and contracting your services, you must report all your income streams, including wages, benefits, and expense reimbursements, during tax filing.
Running a limited company while employed
What if you run a limited company while also being employed? In this case, your company must manage its tax affairs, including submitting tax returns and paying Corporation Tax.
Maximising your trading allowance
The trading allowance is a tax exemption that can be beneficial for individuals with small self-employment income. It provides a tax exemption for the first £1,000 of self-employment income. If your self-employment earnings are £1,000 or less, you don’t need to report this to HMRC, as it falls under the automatic exemption provided by the trading allowance.
However, there are some restrictions to be aware of. The trading allowance cannot be used against income from any work where the payer is your employer. If your self-employment earnings exceed £1,000, you can deduct the trading allowance from your gross income to calculate your taxable profit. And remember, you can’t claim both the trading allowance and your actual business expenses – you’ll n
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Summary
Navigating the world of dual employment can be complex, but with the right knowledge and preparation, it’s entirely manageable.
We’ve covered a lot of ground in this post, from understanding the legalities of dual employment, managing taxes for multiple income streams, and setting up your self-employment, to understanding the implications of employment law, financial planning, and navigating specific scenarios.
Remember, the key to successful dual employment lies in understanding your responsibilities and planning wisely. With a clear grasp of your tax obligations, a solid financial plan, and a good understanding of your rights under employment law, you can make the most of your dual income streams. Embrace the challenge, and reap the rewards!
FAQs
You will have to pay taxes on your employment income through PAYE and also pay taxes on your self-employment profits through the self assessment system. It’s important to ensure proper tax compliance in both areas.
No, your tax code will not change if you are both employed and self-employed. Your employer will continue to pay tax based on the tax code provided by HMRC
If you are both employed and self-employed in the UK, you will pay tax on your employment income through PAYE and on your self-employment profits via the self assessment system. You must complete a self assessment tax return each year, including both your employment and self-employment income.
Yes, you can work a second job self-employed, but you’ll need to register as self-employed with HMRC, file a Self-Assessment tax return, and pay your own taxes and National Insurance contributions.
Yes, you should register as self-employed with HMRC as soon as you start your self-employment activities.
