Q: I work full time (40 hours a week) and as well as this I want to run a side business online. How is the tax I currently pay affected, ie how much more will i pay, and do I have to pay National Insurance twice?
Mar 14 2011
Answered by: Clive Lewis Ask a question
In the case of UK residency any extra income from a side business will also be subject to UK taxation. If this is as self employed basis (as opposed to trading through a limited company, see below) you will have three months to notify HM Revenue & Customs that you have started self employment in addition to having an income from employment.
As a sole trader you should expect to complete a 'self employment' section of your annual tax return after the end of the tax year (5th April), using a set of accounts to complete this section of the return. Income tax on self employment is payable in two instalments on 31st January and 31st July. It is likely that your tax personal allowance has already be given against your employment income. So the self employment income will be taxed at your highest tax rate and the additional income may push you into a higher tax band (see next paragraph). Although, if you are self employed you are allowed to deduct relevant expenses such a computer costs, telephone, etc against the self employment income
After you complete your year end tax return you will receive a calculation from HMRC showing whether you have any further tax or NIC to pay as a result of the amalgamation of all your sources of income less any allowances you are entitled to. By combining your two sources of income you may be pushed above the threshold for the basic rate of income tax. If after your tax personal allowance (£6,475 in 2010/11 for people under age 65) has been deducted, your total income exceeds £37,400 (which is taxed at 20 per cent), taxable income above that will be taxed at 40 per cent.
You ask about National Insurance Contributions (NIC). As an employee you in 2010/11 you pay Class 1 (not contracted out) NIC of 11 per cent on earnings between £110.01 and £844 per week. Above £844 per week you pay an additional 1 per cent. Self employed people pay Class 4 NIC of 8 per cent on profits between £5,715 and £43,875 and a further 1 per cent on earnings over £43,875. The NIC percentages are scheduled to change for the tax year commencing on 6th April 2011, with 1 per cent added to the employees deduction and the additional percentage on higher earnings increasing to 2 per cent.
You may be advised to create a limited company through which to trade your online side business. Trading through a company can offer opportunities for saving income tax and NIC by paying dividends on any profits earned rather than taking a salary, which would be taxed as an employee.
However, these rules can get very complicated and so, if you feel, they may be relevant to your situation, you should seek the advice of a chartered accountant. You can find one at www.icaewfirms.co.uk.
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