Paying Income Tax on freelance work as a second job

UK freelancer numbers have grown massively in the past 20 years. Although there were 1.2m freelancers in 2000, now there are an estimated 2.2m. And while 1.9m are full-time freelancers, some 239,000 freelance part time as a so-called “side hustle” to earn a few extra quid.

Maybe you’re considering joining them by freelancing as a second job or possibly you’re already doing some “moonlighting” or weekend freelance work. So, what do you need to know about tax and telling HMRC about your additional freelance income? Here are answers to some frequently asked questions about freelancing as a second job.

DO I NEED TO TELL HMRC IF I FREELANCE AS A SECOND JOB?

Most people who freelance as a second job do so as a “sole trader”, which is simply another term for being self-employed. You can be employed for your day job and self-employed as a freelance in your spare time, it’s perfectly legal.

When you start working for yourself, you need to inform HM Revenue & Customs (HMRC – the UK tax authority) by registering for Self Assessment, which is the system HMRC uses to collect Income Tax. You register for Self Assessment online via the Government Gateway platform and HMRC recommends that you do it as soon as possible.

Even if you’re earning a relatively small amount from freelancing, it’s still additional income that you must declare because Income Tax may be due on those earnings. There are sanctions for failure to pay tax owed on earnings, whether freelance or otherwise, and they’re much more serious if you deliberately conceal income.

• Find out what information you need when you register for Self Assessment.

Need to know! Some employment contracts allow employees to freelance – others don’t. If in any doubt, ask your employer. You may not be allowed to freelance for your employer’s clients/customers or there may be restrictions on when you can freelance, so that it doesn’t interfere with your day job.

WILL I NEED TO COMPLETE A TAX RETURN IF I FREELANCE AS A SECOND JOB?

Yes, unless your total earnings are very low. Each year, you must complete and file a Self Assessment tax return (SA100), detailing your earnings and costs for the previous tax year, so that your Income Tax and National Insurance contributions (NICs) can be calculated on all your taxable earnings. HMRC will then calculate your additional Income Tax liability and send you a bill, which you must pay directly.

HOW MUCH TAX WILL I PAY IF I FREELANCE AS A SECOND JOB?

HMRC will consider your employed job as your main income source and you’ll get a personal allowance for this. The standard Personal Allowance for 2021/22 and 2022/23 is £12,570 and you don’t pay tax on earnings up to this amount. If you claim Marriage Allowance or Blind Person’s Allowance, your tax-free earnings will be slightly higher. Earnings over the Personal Allowance threshold are subject to Income Tax at:

Your day-job earnings will be taken into account when HMRC works out your Income Tax liability on your freelance profits, because Income Tax is payable on your total earnings.

Need to know! Adding your day-job income and freelance profits together could push you into the higher-rate Income Tax bracket, with all or some of your freelance earnings consequently taxed at 40% if your total earnings are more than £37,700.

WHAT ABOUT NATIONAL INSURANCE CONTRIBUTIONS?

As an employee, you already pay Class 1 National Insurance contributions (NICs), which are deducted via your employer’s PAYE/payroll. But, second-job freelancers must pay additional NICs, which also go towards such state benefits as State Pension, statutory sick pay, maternity leave, etc.

• If your freelancer/self-employed profits are more than £6,725 #, you’ll pay flat-rate Class 2 NICs of £3.45 per week. You can set up a direct debit to make this easier.
• If your freelancer/self-employed earnings are between £12,570 and £50,270, you’ll pay Class 4 NICs at 9% and 2% on any earnings above £50,270. Your Class 4 NIC liability will be worked out based on the figures you submit in your Self Assessment tax return.

WHAT EXPENSES CAN I CLAIM IF I FREELANCE AS A SECOND JOB?

Sole trader freelancers pay tax on their profits (i.e. earnings minus costs), not their gross/total earnings or sales. You may be able to deduct some costs – known as “allowable expenses” – from your earnings, which will reduce your yearly profit and resulting tax bill.

For an expense to be allowable, it must be generated “wholly and exclusively” for trade. You can’t claim for expenses that result from personal use. If you use something for business and personal reasons (e.g. your mobile phone), you can only claim allowable expenses for business use, which you’ll need to calculate reliably.

If a spare room in your house is the base for your freelance business, you may be able to claim for some of your Council Tax, rent or mortgage interest payments, water rates, gas and electricity, landline telephone, broadband, office furniture, etc. Again, you’ll need to reliably work out how much to claim. Alternatively, you can claim a flat rate amount under simplified expenses, as long as you work for 25 hours or more a month from home.

You should scrupulously record all of your freelance costs and earnings, preferably into accounting software, because this will make completing your Self Assessment tax return much less laborious (although there are ways to make completing your Self Assessment tax return even simpler). Plus, you’re less likely to make mistakes or miss anything out if all your earnings and expenses are recorded. You’re required by law to maintain accurate financial records of your freelance income and costs.  

• Read our guide: 45 allowable expenses you can claim when you’re a sole trader.

Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.