You can’t go far these days without hearing about the benefits of a side hustle. People love to shoot about their secondary source of income on LinkedIn or share inspirational posts about how you can get your own side gig. We’ve even written about it on DumbFundeded.
And it’s good advice: if you want a little more money coming in each month and you have spare time and a marketable skills or hobby then this is a great way to improve your income.
However, unless you’re already freelancing, a side hustle puts you into the awkward position of being both employed and self-employed at the same time. Which can make managing your money, and understanding the tax implications in particular, a little more complex than many of us would like.
The first thing to know is that being employed and being self-employed are not mutually exclusive states. They simply refer to different types of work arrangement, and anybody is welcome to carry out both at the same time if they wish to. One of the key differences is the fact that, as an employee, you don’t need to worry about paying tax every month. It’s simply deducted from your pay before the money lands in your bank account.
Once your self employed you also need to pay tax directly to the government, which is done by submitting an annual tax return. Budgeting for that tax return is where things can get a little tricky. It’s important to put away a little bit of money each month to contribute towards the final bill. Generally, freelancers can calculate their tax payments by typing their income into one of many online tax calculators. These will give you a breakdown of how much you’re likely to owe based on income, so you can set money aside accordingly.
What the majority of tax calculators don’t do, though, is show you how your other employment income affects your tax bill. And if your additional earnings put you over the £50,000 higher tax threshold then it could mean that you’re not setting aside enough money.
Say, for instance, that your salary is £40,000 and your self-employment income is £15,000. This would put you £5,000 over the threshold, meaning that the last £5,000 is taxed at the higher 40% rate. So, you’d need to factor that into your calculation to ensure that you didn’t end up short of cash at the end of the year.
Luckily, we have been able to find one salary calculator out there that helps you do this. Type in the numbers for both of your incomes, and you’ll get a much clearer idea of how much additional tax is going to be owed. You should also consider the additional student loan repayments that you’ll need to make – we’ve heard of people being caught out in the past because they’ve saved their tax payments but forgotten about additional student loan costs. Most importantly, remember that none of this counts as financial advice.
While we’re very happy to share information about what it means to be self-employed and employed at the same time, we can’t tell you how best to manage your income. So if you’re at all unsure, seek the help of a qualified financial advisor.