Have you been having thoughts about turning your hobbies into money since lockdown or even way before? If so, you are probably wondered about being employed and self-employed at the same time.
These days, the majority of people have a side hustle, whether you are selling eyelashes on Instagram or second-hand sofas on Facebook.
If you have ever started your own business, you will know about being employed and self-employed at the same time. However, if you haven't, you will have a million questions.
In this article, I will be answering the ultimate question: can you be employed and self-employed at the same time? and I will expand into what you will have to do to achieve this.
Yes, it is possible to be both employed and self-employed simultaneously. For instance, you can work for an employer during the day while also managing your own business in the evenings.
The key difference lies in the taxation process: the income from your employment will be subject to PAYE (Pay As You Earn), while the earnings from your self-employed venture will require declaration through a Self-Assessment Tax Return.
What do we mean by being employed?
Being employed is when you work for a company that has its own payroll and you are on said payroll. For example, if you work for Primark, they become your employer and you become their employee.
You’re probably an employee if most of the following are true:
If you work most days of the week unless you are on leave, such as
- Holiday – This should be 5.6 weeks per year if you’re working full time and if you work part-time it’s how many days you work times 5.6, for example, Charlie works 4 days a week, therefore it will be 4 x 5.6 which is 22.4 days. Bank holiday might be included in this as well, but you need to check that with your employer.
- Sick leave - To claim sick leave, you will need to provide a fit note to prove you are taking the leave due to you being sick.
- Maternity leave –To claim maternity or paternity leave all you have to do is let your work at least 15 weeks before your due date, but you can take this whenever you want, if you wanted to take it right at the start of your pregnancy you are allowed to.
You have to do a minimum set of hours a week/month and you are paid for those hours. For example, if you are working work full time which is around 40 hours a week or part-time which is around 20 hours.
If in your role you have a manager or a supervisor who helps you with your workload and they usually let you know what to do.
If you look at your contract and it says that you are entitled to Statutory Sick Pay, you should be able to get £96.35 per week for the duration of up to 28 weeks, if you are sick and unable to work. This should be paid by the business you work for, and maternity or paternity pay
When you get added to your companies pension scheme, which is when you are aged between 22 and the state pension ages, however, if you are under 22 you are still able to join your companies pension scheme if you ask them to and you also have to be earning at least £10,000 per year.
If you happen to do something bad at work and they’re able to use their disciplinary and grievance procedures with you
If when you go to work your job provides you with the materials, tools and equipment you need
If your contract or offer letter uses the terms ‘employer’ and ‘employee’
What is being self-employed?
Being self-employed is when you run your own business. For example, you bake cakes at home and sell them (becoming an entrepreneur). By becoming self-employed you take all the responsibilities for the success or failure of the business.
If you decide to become self-employed, you won’t be getting paid through the PAYE system and you will also not receive the same employments rights as someone who is employed.
You are self-employed if:
You run your business for yourself and take the responsibility for businesses wins and losses. For example, Claire makes earrings and sells them on Etsy, if the laptop she uses to help in the business breaks she will have to pay for it herself.
You are the decisions making body, which means you get to pick everything you do, including where you will be working and when you want to work. So this means that you can choose what time you work if it a 9 am-5 pm or 1 pm-10 pm. It's all up to you.
You can hire other people that you pay for to help you or to do the work for you. An example of this is if Charlie creates his own designs and puts them onto clothing such as hoodies, jumpers and t-shirts, and he hires Jack to deliver the hoodies to his clients. Jack becomes Charlie's employee, even though Charlie continues to be self-employed.
You buy all the equipment you and whoever is working for you will need. In the example above, Charlie needs a laptop, phone, embroidery machine and a van/car for Jack to do his delivery.
You decide when you work, if you want to work 9 am to 5 pm you can, however, you become solely responsible for finishing any work you are not happy with within your own time
You decide how much you will charge for your work and you have to tell your clients how much you will be charging.
You make a profit from the services/goods you sell. I will be explaining how you can work out how much profit you get to keep: The first thing you have to do is work out how much you received in that assessment year. Then you will have to take away any cost (only deduct costs that you had to pay for to run your business and that we're only paid to let you run your business). You will then have to take away the money you have put set aside for the taxes and national insurance. You will then take away any money that you decided to put aside for your private pension. And finally, you will need to deduct any losses you might have had, from the previous tax years.
If you are still not sure if you’re self-employed, you can check whether you’re self-employed online via the gov.UK website or contact HMRC by phone on 0300 123 2326
Registering yourself as self-employed
To start it’s very easy, you simply need to set yourself up as a sole trader.
Being a sole trader means that you run your own business as an individual and are self-employed. You can keep all of your business’s profits after you paid tax on them.
However, you are personally responsible for all losses your business has, and you'll have to pay any debts it suffers.
You have to set yourself up as a sole trader if any of these apply:
If you have earned anything more than £1,000 from self-employment between 6 April 2020 and 5 April 2021. If you will ever need to prove you are self-employed, for example, if you need to claim Tax-Free Childcare or if you want to make voluntary Class 2 National Insurance payments that will help you qualify for benefits, such as, basic State Pension and Maternity Allowance
As a sole trader you’ll have to:
You must remember to keep every single record of your business’s sales and expenses. For example, when Charlie buys a new embroidery machine, he needs to keep the receipt. He also needs to keep all the receipts for the gas he pays for the delivery, the M.O.T and even the insurance. You can claim back most things you use for your business to an extent.
You have to remember to send the Self-Assessment tax return every year without a failure or you can be fined, which is something you don’t want.
You’ll have to pay Income Tax on your profits and Class 2 and Class 4 National Insurance
The difference between Class and Class 4 National insurance is that you will be classed in Class 2 if your profits are above £6,515 or more per year and you will be classed Class 4 if your profits are over £9,569 or more per year.
If you are an employee, you have employment rights which can include these:
- Receiving Statutory Sick Pay
- Being eligible for statutory maternity, paternity, adoption and shared parental leave and pay
- Receiving a minimum notice period if your employment contract is being terminated
- Having protection against unfair dismissal
- Having time off if an emergency occurs
- Receiving Statutory Redundancy Pay
However, for some of these rights, you will have to be employed at the company for a constant period of time before you qualify for them. If you check your employment contract, it may state how long this qualification period is.
Unfortunately, employment law does not cover self-employed people in most cases because you will be your own boss.
Still, if you are self-employed:
- You will have protection for your health and safety and also protection against discrimination
- Your rights and responsibilities are set out by the terms of the contract that you have with your client
PAYE is an abbreviation for pay as you earn, which is what employed people do. PAYE is used to take out your income tax before you receive your wages, so you don’t have to worry about paying your taxes as it does it for you.
Your employer will be using PAYE which will then send your tax money directly to HMRC, this is also taken away from your pay at the end. Your National Insurance and Student loan repayments (if you have any) are also taken away.
PAYE is based on how much money you are earning and also, your eligibility for the personal allowance.
The personal allowance is an amount that you are allowed to earn before being taxed. For the tax year of 2021-22, the personal allowance is £12,570, however in 2020-21, it was lower at £12,500.
You only start paying income tax once you have gone over the personal allowance, you then are charged at a rate of 20%,40% or 45%. However, this will all depend on how much you earn which puts you in a tax band. Where you are either basic rate, higher rate or additional rate taxpayer.
The tax bands are simple:
|Band||Taxable income||Tax rate|
|Personal Allowance||Anything up to £12,570||0%|
|Basic rate||Anything between £12,571 and £50,270||20%|
|Higher rate||Anything between £50,271 and £150,000||40%|
|Additional rate||Anything that goes over £150,000||45%|
For example, Lorna just started working in a media company and her salary is £27,000. The personal allowance is an amount that you are allowed to earn before being taxed. In her first month, she will already be paying taxes as her personal allowance will be spread over the 12 months. £12,570 which is her personal allowance will not be taxed. However, the remaining £14,430 will be taxed and will spread over the tax year which is 12 months.
However, if you earn over £125,140 you will not receive the personal allowance on your income. This is since your personal allowance goes down a £1 for every £2 that your adjusted net income is above £100,000. So if you are earning £125,140 or more, your personal allowance will be £0.
Scotland is the only country in the UK that doesn’t have this threshold.
If I’m self-employed, am I exempt from PAYE?
Yes, although only if most of these apply to you:
- If your business is for yourself, and you’re responsible for the success or failure of your business and you can make a loss or a profit
- If you can decide what work you do and when, where and/or how to do it
- You can hire someone else to do the work
- If your employer agrees to a fixed price for your work (commission work).
- You use your own money to buy things for the business, cover running costs, and provide tools and equipment for your own work or the work of those employed by you.
If you are self-employed, you should be filling out the self-assessment tax return forms just once a year and you also will have to make two payments to the HMRC, which will be every January and July. In some circumstances, you will be able to just pay through PAYE instead, all that this means is that your taxes will be paid automatically so there is no danger of missing a deadline.
You can pay for your self-assessment bill through PAYE:
1. If you owe less than £3,000 on your tax bill
2. If you already pay tax through PAYE, an example of this if you are an employee or
3. you get a company pension alongside earning income from self-employment.
For you to use PAYE you will have to submit your paper tax return by the 31st of October, or you can do an online tax return by the 30th of December.
Now if you do match the conditions above, HMRC will then automatically collect the money you owe through PAYE, they will only not do this if you ask them not to on your tax return. If the points above don't all apply to you, you will have to pay by instalments in its place.
How does Self-Assessment Tax Return work?
Self-assessment is the system that HMRC has put in place to collect income tax if you are self-employed and don’t pay through PAYE.
As explained above, income tax is usually taken automatically from wages (PAYE) and pensions. However self-employed people and businesses with extra/other income have to report it in a tax return.
If you have to send a self-assessment tax return, you must fill it in after the end of the tax year (5 April) it applies to. You must file your tax return either online or send a paper form.
Nonetheless, if your business has in any way been affected by COVID-19, you might be able to claim a grant through the Self-Employment Income Support Scheme. This can be especially helpful for small businesses or start-up companies.
It’s fairly easy to fill in your returns, as previously mentioned you must keep a record of bank statements or receipts, just so that you can fill in your tax return correctly. You are now also able to get help filling in your return.
HMRC will then see what you owe based on what you’ve told them, you will then have to pay your Self-Assessment bill by the 31st of January. Now, how much tax you pay all depends on the Income Tax band you fall into.
You have to send a tax return form if, in the last tax year you were:
- Self-employed as a sole trader and you profited more than £1,000 before you took off anything that you can claim tax relief on.
- Or you are a partner in a business partnership
However, there are big penalties if you fail to send your tax return on time. HMRC will make you pay a late filing penalty of £100 if your tax return is up to 3 months late. If your tax return is later than 3 months you will have to pay more, or if you pay your tax bill late. HMRC also charges interest on late payments. So, you are warned, please be careful!
Now that we have gone through whether you can be employed and self-employed at the same. I hope this has helped you and you found it a useful read. Now, remember that it is very important to balance your employment and your own business just as long as you can keep track of how much tax you owe and you're able to file your tax return on time.