Articles - 8th October 2020

A guide to dealing with tax as a part-time freelancer

Words by Maxine Harrison
Illustration by Will Francis

Freelancing, or running a small business, requires constant navigation. Completing your own tax is probably not at the top of the list of reasons why you would become a freelancer, and may be the least attractive prospect of this form of work for you. But nonetheless, it has to be done.

If you’re currently working as a PAYE in the UK and want to freelance at the same time, or perhaps you’re doing this already, this post is designed to help you better understand the process of paying tax as a part-time freelancer and PAYE.  The process slightly differs to paying tax as a full-time freelancer.


What is a part-time freelancer?

So, for the purposes of this piece, part-time freelancers are those who are PAYE’s by an external employer, and at the same time, freelance on the side to form a collective income. So, you are both self-employed and an employee via other means.


Registering As Self -Employed

If your self-employed freelancing income is more than £1000 per year, you will have to register as self-employed (if you’re a sole trader), and file tax every year if you earn over this amount too. Even if you earn within the tax-free personal allowance of £12,500.

Registering as a Sole Trader or Limited Company are the two most popular choices freelancers tend to go for when registering as self-employed.

However, if you’re a part-time freelancer, registering as a sole-trader is much easier.

HMRC introduced the £1000 legal threshold to register as a Sole Trader, to make it easier for those who are self-employed on the side, to declare their income. So why not take advantage of this? It gets a little trickier if you register as a Limited Company if you’re freelancing on the side.

Please note the tax personal allowance changes annually. The figures referenced in this post refer to the tax year of 2020-2021.

It’s important to register as self-employed as soon as you can. You don’t want to leave it too long for HMRC to find you because when they come, they come with big fines. To avoid any trouble, ensure you approach them first to register as self-employed and declare your income.


Paying tax as an employee and part-time freelancer

In the UK, the financial year starts 6th April and ends 5th April the next year. You can either complete your Self-Assessment form by mail, or online. The deadline to mail in the Self-Assessment form is 31st October, whilst the online deadline is three months later on January 31st.

If you’re already paying tax on your PAYE job, you still need to declare your freelancing income with HMRC. The reason being is that tax is deductible from your income overall.

For example, if you earn more than £12,500 on your PAYE job and you also earn over that amount through your freelance work, you would have to declare and pay tax on the total of both incomes through HMRC via the Self-Assessment form.

If you earn over the personal allowance threshold (£12,500) and below the upper limit of the basic rate, (£50,000), you will pay 20% income tax of all earnings. However, if you earn above the upper limit of the basic rate, you’ll need to pay 40% of all these earnings until you reach the higher rate limit of £150,000.

Please note that tax boundaries differ in Scotland, so visit this link for more information on that.

You can also claim for tax relief on certain items. This is anything you need to run your business- from subscriptions, to internet and even rent! Anything you need to run your business can be tax deductible. Just make sure you take note of these things throughout the year.


Worried about your employer finding out?

It’s always best to check your employee contract for any terms that state you cannot look for work outside of what you are currently doing.

However, either way, the information you provide HMRC with is strictly confidential and they will not share this with your employer. This is especially true if you are registered as a Sole Trader.

When you are registered as a Limited company, the rules slightly differ as the information about your company is available for the public to gain access to. So, your employer could find out information about your freelance business this way, if you’re a Limited Company.

But if you register as a sole trader, the only realistic way your employer will find out about your freelancing is if you tell them yourself directly! Be careful, and make sure you look through your contracts. I’d never recommend flouting your employer’s contract terms. But if it allows it you to, you shouldn’t be worried either way.


National Insurance

There are different classes to pay your National Insurance;

Class 1 National Insurance is usually taken as a PAYE through your employer.

However, if you’re self-employed, you will fall under Class 2 or Class 4, depending on your income.

Most self-employed people tend to pay National Insurance through their Self-Assessment form when declaring their income to HMRC.

Class 2 National Insurance takes place when your self-employed profits go over £6,475.

Class 4 is if you are doing really well with your self-employed profits. Here, you would be charged 9% of all self-employed profits between £9,500 and £50,000, and at 2% for all profits greater than £50,000.


Round Up

Freelancing is increasingly becoming a popular workstream. It’s a great way to try out a new service you have in mind, especially if you can do it alongside your PAYE job. But before you jump into this, it’s important to know exactly what you are getting into – both the glamorous and not so glamourous bits. That includes tax! Hopefully, this piece has helped you gain a little more understanding about tax as a part-time freelancer.

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