Whether you're running a business that you plan to take full time one day, or simply enjoy the side hustle life, if you run your own business alongside a job, the tax side of things can get confusing.
When you combine your wages from employment and what you've earned while self-employed, working out how much tax you owe can get a little complicated.
Here's our guide to dealing with it if you're balancing both.
Business or hobby?
There's a difference between making a profit through a business and making some money through a hobby.
HMRC usually assess this on a case-by-case basis, but they outline what they call "badges of trade". If what you're doing matches up with the badges of trade, it's likely to be classed as a business rather than a hobby and you'll need to declare the income from it.
Let's look at some examples.
If you sell some of your old clothes on eBay every so often, this would usually be classed as a hobby.
But if you buy clothes for the purpose of selling them on eBay, for a profit, on a regular basis, this would usually be classed as running a business.
If you're running a business, you will need to declare this to HMRC.
When you're employed, your Income Tax will be calculated for you and deducted from your wages before you receive them.
But when you're self-employed, you receive everything you earn and pay a tax bill when you've submitted your Self Assessment tax return.
When you're employed and self-employed, you'll need to declare information about your earnings from employment when you fill in your tax return, so HMRC can calculate the correct amount of tax for you taking into account what you've already paid through your salary.
Completing your tax return
You will still file your Self Assessment tax return as usual, but you will be prompted to give details about the tax you have paid through your job, too.
The information you need will be on your P60, which your employer should give you at the end of each tax year (5th April) as confirmation of how much tax you have paid. Make sure you keep this in a safe place so you can refer to it when you fill in your return.
The self-employment section of your tax return is separate to the section about your employment, so things like business turnover and expenses should still be input as normal.
Personal allowance and Income Tax bands
Unless you earn over £123,000, each year you will have a personal allowance which you don't have to pay tax on. This usually changes each year, but for 2017-18 the personal allowance is £11,500.
So, if you earn under £11,500 during this tax year, you won't pay tax, but will still need to declare your income. If you earn between £11,501 and £45,000, you'll pay basic rate tax at 20%, but only on the money you earn over £11,500.
Let's say you're a blogger who also works in an office. Your office job pays you £10,000 a year, and you earn £5,000 from sponsored posts and affiliate links from blogging each year, too. So in total, you're earning £15,000
You won't pay any tax on the amount you earn from your job, as it's below the personal allowance amount of £11,500. However, with your blogging income, you've gone over the threshold and will pay basic rate tax of 20% on £3,500. You'll only pay tax on the amount that's over your personal allowance.
To complicate things a bit, the next year you've been promoted in your office job. Yay! You've been given a pay rise to £30,000 per year. In addition to this, your blog has grown and you're now earning £20,000 per year from it. An excellent year all round.
Your total income for the next tax year is £50,000, which takes you into the next Income Tax band, known as higher rate, at 40%.
You'll still have the first £11,500 you earn with no tax to pay on it.
You'll pay the basic rate tax of 20% on £33,000 (£45,000 minus your personal allowance).
And you'll pay the higher rate tax of 40% on £5,000 (the amount you earn above the £45,000).
When you fill in your tax return, HMRC will calculate this for you, but it's best to have an idea of how much you'll be paying so you don't get a nasty surprise when you file your tax return.
Don't forget about National Insurance!
If you're employed and earn over £157 per week, you'll be paying Class 1 National Insurance Contributions ("NICs") through your employer, similarly to the way you pay tax when you're employed.
If you're self-employed and have made a profit of £6,025 per year, you'll pay Class 2 NICs of £2.85 a week. If your profits are £8,164 or more per year, you'll pay Class 4 NICs, which vary depending on how much you earn (here's some more info on this). Your NICs will usually be calculated and paid through Self Assessment.
If you pay Class 1 NICs through your employer but make a profit of £6,025 per year from being self-employed, you still have to pay Class 2 or 4 NICs, but in some cases you can defer paying NICs or claim a refund for previous tax years.
It’s time to swap money stress for financial empowerment.
The Independent Girls Collective is a members-only platform to help smart women like you to take control of their finances and feel good about money.
As a member, you’ll get new courses, resources, live masterclasses and 1:1 coaching every month to help you manage your finances and provide the support you need to build a successful, fulfilling business that allows you to live the life you desire, as well as access to our supportive community of creative female entrepreneurs.