Are you certain about your employment status?
Has your hobby turned into a nice little earner on the side that’s helped you combat some of consequences of the credit crunch?
Do you know that you can be employed and self-employed at the same time? And just because you already pay tax through your employer doesn’t mean that you don’t have to pay tax on your second income?
HMRC second income warning
HMRC operate a range of ongoing tax campaigns that investigate on different kinds of taxpayers. Their purpose is to help people establish and maintain accurate tax records and payments. One of its latest campaigns is intended to support the full declaration of any taxpayers’ second income.
The HMRC Second Income Campaign
Just from volunteered information alone, the Tax Office has secured £580million of payments since 2007 and a further £283 million from subsequent investigations. They have also seen through criminal proceedings which concluded with £593,000 paid back to the Treasury and 8 people in jail.
Earning a second income from property rental has come under scrutiny during a previous HMRC campaign, the most recent directs its attention to other sources of a second income. During the recession, which is officially now over, many employed people turned hobbies and skills into essential supplementary earnings for their household.
The need for this extra bit of cash has not receded and if you are one of these second income earners, you need to make yourself aware of the tax regulations. The newest tax office campaign is most interested in the following fields;
- Hairdressing, personal training, fitness classes, taxiing.
- Car boot sales and market stalls – selling and buying items
- Event and party organisation
- Training provision and consultancy
- Selling items you have made yourself
If you earn anything from any second income stream then you become ‘self-employed’ as well as ‘employed’. This raises the issue of tax and national insurance payments on your additional income alongside those that you pay through your employer.
As an employed UK resident HMRC allow you the chance to volunteer any second income information and eliminate the possibility of heavy fines or even criminal charges. There is even a ‘Second Incomes Voluntary Disclosure Opportunity’ in place so that you can sort out previous years of undeclared self-employment with HMRC and get things shipshape for the future.
In this climate of stricter tax rule enforcement it pays to be transparent with your financial situation. As Mhairi Lees, of Alexander Sloan Chartered Accountants, said, “As tax specialists, our view is that taxpayers should make sure their tax affairs are able to withstand scrutiny”.
I don’t know if I’m self-employed or not!
It is crucial that you understand your own employment status so that you can abide by the relevant taxation laws. It also influences your employment rights and the benefits to which you may be entitled. Self-employment sometimes emerges slowly over time as a skill or hobby forges a new pathway towards a source of income.
Sometimes it is calculated growth, with other employment maintained until the self-employment can take over the generation of a liveable income. Either way, you can be employed and self-employed at the same time and you are responsible for ensuring that you fulfil the requirements of the self-employment tax regulations.
Indicators that you are ‘employed’;
- Someone else defines you job description and tells you how, where and when to do it.
- You must fulfil your role by yourself.
- You are paid a salary or wage weekly or monthly.
- There is the possibility of a bonus or overtime payments.
- You have contracted hours of work.
- You supervise of manage colleagues.
Indicators that you are ‘self-employed’;
- You define the goods or service you provide.
- You decide how, where and when you do the work.
- You have your own money invested and at risk.
- You provide all the equipment necessary to do the work.
- If work is deemed unsatisfactory by the client then you have to rectify it at your own cost.
- You may ask a fixed price for a job without any time boundaries.
- You can make a profit – and a loss.
- You often have several clients’ work to do simultaneously and use a business structure to ensure efficiency.
- You can hire employees or pay for ‘help’ using your own money.
How does this change how I pay Income Tax and National Insurance?
All income is taxable. The clear distinction between employed and self-employed status is who holds responsibility for making those payments to the tax office.
Employed
If you are employed by someone else, then it is their responsibility to deduct tax and National Insurance contributions from your pay and record this on your pay statements. This is called the Pay As You Earn (PAYE) system.
Self-employed
If you are self-employed then it is your responsibility to tell HMRC of your second income and pay the tax and National Insurance as required. You do this using a system called Self-Assessment which means you have to complete a Self -Assessment Tax Return form every year.
Remember – you can be both at the same time and “I didn’t know” will not be considered an acceptable excuse for not paying your extra tax.
Confused? Maybe some examples will help.
Molly
Molly has three different part-time jobs for which she has to work minimum set hours every week. Two of the jobs pay her monthly and one pays her weekly. All three jobs provide her with pay statements which show the PAYE and National Insurance payments that have been deducted.
Despite having multiple jobs, Molly is not self-employed because all three jobs are working for employers who have the responsibility for her tax and NICs payments.
Jerome
Jerome has a full-time job from Monday to Friday as a computer technician. He is paid monthly for this and his wage statement shows his NICs and tax deductions. To supplement this income, he also does basic DIY jobs at the week-ends. He decides whether to accept the work, how much he will charge the client and occasionally pays his brother to help him out if he thinks he will overshoot the agree completion deadline. Jerome is both employed as a computer technician and self-employed as an ‘odd job’ person. Jerome fills in a self-assessment tax return every year to make sure he is paying the tax and NICs he owes on this extra work.
Kitty
Kitty has 12 years of experience working in the financial sector. She now works part-time for a company as a manager and receives a monthly salary from which her tax and NICs have been deducted, as shown on her payslip. As Kitty has an excellent reputation in her field and she is in high demand as a speaker for a variety of audiences in her sector. She does not do this as a representative of the company, but as an individual. Kitty sets her own fee as a speaker and receives all of the payment directly. She also fills in a self-assessment tax return in order to declare the extra money she makes from this additional work. So Kitty is both employed as a financial manager and self-employed as a professional speaker.
What do I need to do if I’m self employed?
- Register yourself as self-employed with HMRC by 5th October. This declares the previous tax year’s earnings.
- Deadlines for filing your self-assessment tax return; on paper – 31st October, online – 31st January. (You need to allow a week for your registration to activate.)
- Class 2 National Insurance Contributions are payable at a flat weekly rate every 6 months.
- Class 4 National Insurance Contributions are payable in two instalments on 31st January and July every year. The amount depends on the profit you make.
- The best way to insure that filling in the Self-Assessment Tax return is as simple as possible is to keep your records in good order. This includes; all income from employment, any tax reliefs you claims (such as charity payments or pension contributions) and any personal income you make (from savings or from selling investments). It also means any receipts from business purchases or travel that could provide evidence for a tax rebate claim.
Tony Shanks