Paying tax when both employed and self-employed
Written by Ray Coman
Sole trader status can come about from freelancing on the side, starting up a business or holding multiple jobs at the same time. For people who are self-employed and employed in the same tax year, this report shows how tax and NI works, with regard to the tax allowance, expense deduction and commonly asked questions.
Can I get a National Insurance refund if employed and self-employed?
Do I have to file taxes even if the amount I made from self-employment was low?
What happens if I have been sent a notice to file a Tax Return but not filed it?
What happens if I have been sent a notice to file a Tax Return but didn’t have to file it?
What happens if I have not told HMRC about being self-employed?
Why does a tax refund arise in the year that I leave employment?
What if I have already been repaid for a tax year in which I need to file a Tax Return?
Can I pay tax on self-employment via my payroll job?
What if I have ceased self-employment?
Is the accountancy fee tax deductible?
What if I have been working from home and don’t have that many expenses?
As I have a car, what motor expenses can be deducted from tax?
Can I deduct physical items I have purchased for the business, like a new laptop and printer?
What if I have hardly had any expenses, and would rather avoid the hassle of working them out?
Do I need a separate bank account for my business?
How should I communicate information to my accountant?
Do I have to use an accounts software as a small business or as self-employed?
Can Coman&Co help with bookkeeping?
Would you advise the use of Coman&Co bookkeeping services?
What records am I required to keep?
What is my taxpayer reference number?
Will I have a UTR if I am self-employed?
At what income level is it a requirement to file a Tax Return?
How to become a Coman&Co client
Being self-employed and employed can result in too much NI being calculated on the Tax Return, and therefore a subsequent refund of NI due.
The reason is that there is no NI calculator on the Tax Return. Once the Tax Return is processed, HMRC will issue a revised assessment of NI if appliable using the annual maxima. The assessment is likely to determine a lower level of overall liability if employment earnings, regarded separately, bring the taxpayer above higher rate tax threshold.
By contrast, an overpayment of income tax can be determined through the Tax Return alone. The reason for the difference is because the National Insurance (NI) threshold is applied separately to each source of income. For employment earnings, the threshold will be weekly or monthly depending on the frequency of pay. In most cases, a monthly threshold is applied. For self-employment the annual threshold for national insurance is always applicable.
Where yearly turnover is less than £1,000, a Tax Return is not required. The penalty HMRC would charge for a failure to notify self-employment is a percentage of the tax owed. A self-employed person who has made yearly profits below the class 2 national insurance threshold (of £6,845 for 2025/26), will not have an NI liability. If someone has been both employed and self-employed in a tax year and the combined employment pay and self-employment profits are below the personal allowance (of £12,570), there would be no income tax. It is possible that someone who has income over £1,000 but whose income is below the applicable threshold would not suffer any penalty as a result of not registering as self-employed. It is nonetheless a requirement to register as self-employed once annual profits exceed a thousand pounds.
The filing deadline is 31 January following the end of the tax year. Any Tax Return filed after this will be late. A taxpayer that has notified HMRC (before the filing deadline) but overlooked to file a Return, would be exposed to the filing penalty, and to interest on any tax owed. Late payment penalties apply to any amount still outstanding 30 day after the payment due date. Unless a leap year applies, the due date is normally midnight 2 March (following the end of the tax year.)
If HMRC sent a notice to file a Tax Return, but the Tax Return was not required, the taxpayer can ask HMRC to cancel the late filing penalty on that basis. This would occur where a taxpayer has registered for self-assessment but doesn’t subsequently become self-employed.
A taxpayer has until 31 January following the end of the tax year to obtain a registration number (also know as a UTR) and file a Return. Provided the Return is filed by 31 January following the end of the tax year there would be no penalty implication. The tax year ends on 5 April. For the year to 5 April 2025 the filing deadline is therefore 31 January 2026.
If the self-employment started longer ago than the most recently passed tax year, any Tax Returns filed would be late. The Returns would not be subject to the late filing penalty (explained above) because a notice would not have been sent to file the Return.
However, it is still beneficial to tell HMRC about the requirement as any penalty would be lower if the taxpayer comes forward before being prompted to do so by HMRC. Telling HMRC about unpaid tax for a previous year is the subject of a separate report.
Tax has already been taken from my employment pay, so why does employment need to go on my Tax Return?
Both self-employment profits and employment earnings comprise taxable income for the year. This total taxable income is assessed to tax using the applicable rates and allowances. Any tax deducted at source (from employment pay) is deducted from the resultant tax liability to arrive at tax payable or repayable. The amount of employment earnings therefore determines the tax rate applied to self-employment.
Too much or too little tax deducted at source from employment pay will be factored into the overall tax payable or repayable. A taxpayer who, say, had overpaid tax by £2,000 on employment earnings but had a £2,000 tax liability from self-employment would have no tax to pay.
Often, too much tax is deducted at source from employment pay in the tax year that a person leaves employment. The reason is to do with the way that tax is deducted at source. So, tax is deducted at source using 1/12th of the rates and allowances. At the time of writing the personal allowance is usually about £12,000. Therefore, an employee gets a 12th of that allowance each month in the calculation of how much tax gets deducted at source. Therefore, the first £1,000 of employment earnings would be tax free. To use an example, a person who left their job after just one month of the tax year (on 30 April), would only have been given the benefit of £1,000 tax free allowance. Whereas that person will probably have more like £12,000 tax free allowance. If the April pay was £4,000, tax would be applied to about £3,000 in working out take home pay. However, if that turns out to be the only pay for the tax year, an amount of £4,000 is well below the yearly personal allowance. Any tax deducted in that first month would be repayable. So, very often in the year of leaving employment too much tax is deducted at source.
As explained above, a tax refund often occurs in the tax year in which a person leaves their employment. Each time an employer issues a payslip, a copy of that payslip is logged with HMRC. The tax authority has a running monthly record of every UK employee’s pay and tax deducted at source. At the end of the tax year, yearly employment pay is compared to rates and allowances. If too much tax has been deducted at source, this is repaid to the taxpayer. This function is carried out by the HMRC PAYE division.
The PAYE function with HMRC is separate from the self-assessment division. The self-assessment division processes refunds based on Tax Returns that have been filed. Therefore, if a Tax Return was not requested by HMRC, any overpayment of tax will be processed through PAYE. If HMRC are later notified of self-employment it will be key to include any amount already repaid in the Tax Return. This will prevent any ‘nasty surprise’ when the HMRC PAYE and self-assessment eventually communicate to determine that benefit of the PAYE overpayment has been given twice. Page TR6 of the Tax Return (SA100) form includes a section “Tax refunded or set off.”
HMRC do not typically add estimated self-employment profits to a PAYE code. It could be possible to update a PAYE Code with “income from another source” to increase the amount of tax deducted at source. This is not usually recommended as there is a cash flow drawback to paying tax in the tax year rather than by 31 January after the end of the tax year.
If the tax relates to a tax year in the past, it is less than £3,000 and the Tax return is filed by 30 December, it is possible to get tax collected via PAYE. However, an estimate of self-employment earnings are not usually added to a PAYE Code.
If self-employment was the only reason for needing to do a Tax Return, the taxpayer should write to HMRC to request removal from self-assessment. The correspondence to HMRC should include the date that that the sole trader business ceased. HMRC will write back and the last tax year for which a Tax Return is required will be the one in which the self-employment ended.
A benefit of self-employment is the greater scope as to the type and nature of expenditure that can be deducted in determining taxable income. Tax relief is available for most of the typical costs required to be in business.
So, examples of the type of expense that are deductible as a service provider would be: telephone, office costs, stationery, any research materials both print and online, subscriptions, learning resources, research and training costs, travel and subsistence. Subsistence is the cost of food and accommodation while away from home on business travel. It typically includes lunch because that's the meal that's eaten away from home. Breakfast and the evening meal are usually eaten at home. So, the reasonable cost of eating whilst at work would also be tax deductible.
The cost of the fee for doing the Tax Return can be deducted from taxable profits of a sole trader and of a landlord. Unfortunately, the fee is not tax deductible in the calculation of employment earnings, investment income or capital gains for instance on the disposal of a buy-to-let property. Higher rate taxpayers pay 40%, additional rate taxpayer 45% and for some with income between £100,000 and £125,000, the rate of tax is 60%. As, for instance, a higher rate taxpayer, it is possible to think of a 40% discount on the agreed accountancy fee, after the resultant tax relief has been applied.
A taxpayer might not have many office travel costs if working from home. However, the cost for using the home as an office can be deducted from taxable profits. The tax deduction is according to a flat rate or to a proportion of the actual costs incurred. The flat rate is usually £10 per month for a sole trader.
The portion of actual accommodation costs that can be deducted from table profits will be determined by the floor area that's used for business as a portion of the total floor area of the home. Floor plans are often provided by estate agents with a prospectus for a rent or for purchase. Any such floor plan can be a useful reference document in this case. Alternatively, fresh measurements would be required.
The portion applied to household costs is therefore the square foot area that's used for work purpose as a fraction of the square footage of the total home. Total household costs would usually include: light and heat, water, council tax, and buildings insurance for a homeowner. Monthly rent for a tenant or mortgage for a homeowner (the interest element of the mortgage only) would often be the most substantial part of the home cost to be apportioned.
The business portion of motor costs is usually found by determining business miles travelled as a portion of total business miles travelled. The mileometer at the start of the tax year- being 6 April and again at the end of the tax year- i.e. the following 5 April, would establish miles travelled. An accurate assessment would record every business mile using a log, usually with the assistance of App technology. Often an approximation of business miles travelled is required for the sake of expediency.
The resultant percentage is applied to motor costs motor including: servicing, MOT, road tax, repair, petrol and a portion of the original cost of the car (referred to as a capital allowance.)
As an alternative to calculating actual motor costs, it is acceptable to apply a mileage allowance. At the time of writing, the mileage allowance is 45 pence per business mile travelled for the first 10,000 miles. The cost of parking, congestion charge and toll gate charges are not related to miles travelled and can be added to the mileage allowance in calculating total motor costs.
Computer equipment and office furniture can be also deducted from taxable profits. This type of outlay is treated as part of the “annual investment allowance” rather than a cost on the Tax Return. Assets (like equipment and furniture) are used in the business. Costs (such as stationery and internet) are used by the business. The annual investment allowance applies to assets. In effect, the assets are deducted from profits in the same way as costs. The main exception is cars. It is only possible to deduct – usually a small portion- of the value of the car from taxable profits each year.
As an alternative, a sole trader can use the trading allowance which is £1,000 per tax year. If expenses are less than £1,000 the trading allowance will help to save tax. Regardless of the level of expenditure, using the trading allowance will simplify the calculation of taxable profits, reduce time and exposure to the negative outcome of any HMRC enquiry. For non-tax reasons, there could be a benefit to using the trading allowance, for instance where the taxpayer is disinclined to calculate profits. The process of calculating profits can be expedited which is of particular benefit where the Tax Return is overdue.
As a sole trader it is not necessary to have a separate bank account. As a company it is necessary to have a separate bank account. A trader will obtain tax relief on costs that have been incurred for the purpose of that business, howsoever paid. Even if a bill is paid for by someone else, such as a family member, provided that bill was required to operate the business, the amount paid will be tax deductible.
It is good practice to have a separate bank account in the business name. This will make it easier to identify costs which are tax deductible. This is because it will not be necessary to separate out work and non-work related outgoings when analysing the bank statement as part of the task of determining tax-deductible costs.
It is now the norm to use the cash basis for accounting for profit (prior to 2024/25 this basis was only available to businesses with a turnover below £150,000.) Pay received less money paid for the year to 5 April determines taxable profits. The cash basis therefore ignores invoice date. The alternative to the cash basis is the accruals basis. This is a trickier method as it can require apportionment of cost between tax years.
Where the cash basis is being used, the bank statement can form the basis of profits calculation. Download the bank statement in a spreadsheet format, group expenses into about five categories and use 5 April as a cut-off. Examples of expenditure categories have been provided earlier in this Q&A.
For employment, please provide a P45 or final payslip for employment that was left during the tax year. If still employed at the end of the tax year, provide a March payslip or P60 document. A summary of income and expenditure will be required for establishing self-employment profits, with expenses grouped into about five to ten categories. If the sole trader has used an accounts software, it is possible to grant the accountant access to that software. Coman&Co re-sells QuickBooks at a slight discount to retail prices.
It is not necessary to use an accounts software and Coman&Co do not require the use of software. If not using a software, a summary of income and expenditure can be extracted from the bank statement. When MTD for income tax is introduced, a spreadsheet bridging software- as a minimum- is likely to be required.
Our fixed fees are based on a summary of income and expenditure being provided. For client who have not carried out summarisation and provide raw primary source data, such as uncategorised bank statement, an additional bookkeeping fee would apply. This fee is calculated on a per transaction basis and ranges from 25 pence to 50 pence per transaction.
Usually, a client is best placed to know if a transaction is business or non-business or which category to apply to an item of expense. Coman&Co is likely to err on the side of caution in any inference made. For instance, the bank statement would only reveal an amount spent at a major supermarket. That expenditure could be: petrol, subsistence or something of a non-work nature. Modification of the bank statement will allow the removal of items of personal expenditure that will improve the relevance of the information drafted for Tax return preparation.
Coman&Co does not need to see the accounting records to prepare the Tax Return. We have no compliance powers and are therefore not checking if the Tax Return is correct and complete. That is the job of HMRC and is administered via tax enquiries. The responsibility of Coman&Co is to guide as to the requirement, and put the information provided by the client into a format that's acceptable to be filed with HMRC. In the case of a person who is self-employed and employed to add the profits summary on the tax return, calculate tax and advise on what tax to pay and by which date. Coman& Co deals with HMRC on behalf clients, advises on tax, filings, liabilities and payments and responds to queries throughout the year.
A taxpayer is required to keep accounting records for six years in case of HMRC inquiry. However, Coman&Co does need to have sight of all accounting records to complete a Tax Return.
HMRC have indicated that it is acceptable to keep expenses in soft copy format. Since contactless, for transactions under £100 a receipt is not usually provided - unless requested. The bank statement is often the only record of a transaction. The bank statement is a combined receipt for the purpose of evidencing transactions. The bank statement can therefore be used as a basis for preparing the accounts.
A unique taxpayer reference (UTR) is a ten-digit number particular to each UK taxpayer who has (or has had) a self-assessment requirement. It is requirement to have a UTR to file a Tax Return and pay tax under self-assessment.
The most effective method for obtaining a UTR is by registering via an online personal tax account. The personal tax account with gov.uk can also be used to check any UTR which has already been issued.
A UTR does not expire. Therefore, if a taxpayer applies for a UTR and already has one, the application would get rejected automatically and the taxpayer given the reason for that in an email. The UTR application is matched against national insurance number and respective personal data.
If HMRC has issued a UTR, it would be on a communication from HMRC. A taxpayer would be posted a letter from HMRC dated 6 April each year letting them know that they need to file a Tax Return. The information can also be found online via a personal tax account.
It would not be possible to obtain a new UTR for anyone who has previously been issued with a UTR. If the application has failed on the basis that there is already a UTR, the taxpayer will need to contact HMRC (most effectively via the online personal tax account) to find out what it is.
Coman&Co would require the UTR in the first instance to obtain the authorisation to be able to communicate with HMRC on behalf of the client. Therefore, we cannot find out UTR numbers for clients.
A UTR is not given automatically; it usually has to be applied for, or in some cases will be issued to a person once HMRC is aware that a requirement to file a Tax Return applies to them. A taxpayer who has previously filed a Tax Return will have a UTR number. This applies even if it is the first time that the person has been self-employed. If income has not exceeded the reporting threshold in the past, it is likely that the taxpayer will not have a taxpayer reference.
If income is above a certain threshold, it used to a requirement to file a Tax Return, even if this income is from employment and entirely deducted at source. For Tax Return reporting, the threshold was £100,000, from 2023/24 and that threshold increased to £150,000. From 2024/25 the threshold was dropped, so a taxpayer whose income is solely from employment will no longer need to file a Tax Return, regardless of the level of income.
From 2024/25, there is also no longer a turnover threshold for the use of the cash basis of accounting for profits.
Please provide a proof of address and photo ID for our anti money laundering purpose. In response an engagement letter and written estimate of our fee would be uploaded to a client portal to please login download and approve. Once approved, we’ll both get a confirmation e-mail. Approving the estimate confirms that you have been added to a system of reminders. However, a client is not obliged to the fee until the information required to carry out the Tax Return preparation has been provided.
Being self-employed has a different character to being employed, and this is covered in the guide on working status. Receiving both type of incomes can apply well to the individual and the added complication should not be a dissuasion from that way of working. Coman&Co provides a service which adapts to the changing needs of our clients and can accommodate a wide range of circumstances.
