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I'm struggling to find an answer to this question that should be fairly simple and would massively appreciate some clarity :)

(Numbers are hypothetical to illustrate the point)

Say in a given tax year I earn £50,000 through employment taxed through PAYE as well as £10,000 through self-employment taxed through self-assessment.

Am I correct in saying that my tax-free allowance of £11,500 is used and because total earnings are £60,000 the self-employment income will be taxed at the higher rate of 40%?

It would make sense but it seems a bit bonkers to lose so much self-employment income as to make it almost not worth it.

Can someone please clarify what happens in this situation?

Rich Jenks
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2 Answers2

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Yes, that's right; in the end, tax is charged on the total of your income in a tax year. PAYE on employment income is just a way of making incremental payments throughout the year.

Note that tax rates are marginal rates applying to bands of salary, not the entire salary. But as your employment salary would be already over the 40% threshold (£45,000 for 2017/8), the entire "extra" from self-employment would indeed be taxed at 40%.

Note that you'll also owe National Insurance contributions. In general if your employed income is over the higher-rate tax threshold, it should be 2% Class 4 NICs on the self-employment income. However, due to various complications in the way the system works, you might be initially charged more than that and and explicitly claim the excess back from HMRC. It might also be less if your earnings are below or only slightly above the "Lower Profits Limit".

You still get to keep 58%, only you can decide whether that is worth your time or not.

Ganesh Sittampalam
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The only way you can save taxes is by starting a limited company, not paying yourself any salary, so you pay 20% corporation taxes, you can take I think £5000 a year dividends tax free, and leave the rest in the company account, and don't touch it until you make less money.

gnasher729
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