Second incomes and tax

[TwinSetAndPearls]

My dp is thinking of doing some freelance work in the evenings and weekends on top of his regular job. He was told that a second income would effect his tax band which would make it pointless taking on extra feelance work - is thius true?

Well if the extra income would take him over the threshold of the next tax band, then yes, it would.

You can check on the Inland Revenue website for the current tax bands.

Affect his tax band, I mean.

But how would this make it pointless? It would just mean he paid more of the extra income in tax.

He would have to decide if it was worth the effort.

I think he was told that all of his salary would be taxed at a much higher rate therefore he would not be any better of.

No, only the salary over the threshold gets taxed at the higher level. This shows the salary bands for the upcoming year - I've had a look on the Inland Revenue website for a simple guide to Income Tax (!) but haven't been able to track one down. I think a look at some of these leaflets might answer your question though?

basically everyone gets one lot of tax-free allowances (currently £4745 pa). After this is used, the next £1980 is taxed at 10% & after that the next £30-odd thousand is taxed at 22%. Over that it's 40%. (but only on the extra)

When you have 2 jobs, all your allowance has usually been used at your first job, so your second job is taxed at basic rate (22% on all of it). From what you've said I assume your DH is already on 40% in which case all of the income from the second job is taxed at 40%- is this where you're getting confused? There will also be additional NI if he isn't paying the max on the first job. HTH.

Thanjs for your advice, perhaps his company didn't want him doing freelnace so misled him!! It wouldn't surprise me.

Now I am off to see where we will stand with regards to tax credits - wish me luck!!

Basically he needs to think about how much he can earn working freelance. any extra income is extra income, you only pay tax on what you earn over the tresh-holds. He will have to fill in a tax-return each year declaring his income from his job and his freelance work. He will pay tax on his freelance work only after the tax year-end, so he needs to make sure that he puts money aside for this. I usually recommend putting 1/3 of your freelance earnings (or 1/2 if you are already in the 40% tax band) away every time you get paid (have a seperate deposit account for this, or buy premium bonds with it). Then when the tax and NI become payable you have more than enough to pay it, so you can buy a treat, or put the surplus into extra pension saving.

I do tax stuff for self-employed people, so if you want to CAT me, I can get in touch and give more help if you like.

it also depends on whether you get child or working tax credit, if either of those are relevant it is conceivable that extra wages could push you over the limit so these are reduced / removed

Hmm, his company may be entitled to refuse to allow him to take on free-lance work if it's in the same field as his main job, it might be best to check his contract. You would think though they would just say so if that were the case, rather than make up stories about his tax.

On the other hand, my company tried a similar tax trick when I took voluntary redundancy, claiming the redundancy amount could become taxable if I went to work for a previous client of theirs. I spoke to an accountant who instantly told me I had nothing to worry about.

I will get him to check his contract, he has done it before when he worked for the form as a contractor where as now he is an employee so things may be different.

AS for tax credits, we get working tax credit and the childcare as well. We get these as they are based on last years income, dp wasn't working full time last year ( wasn't supporting me then- soon put that straight ) so his income was only about ten thousand. This year his basic is about £25,000 and then I bring in a taxable income of about £4000. My maintenance and other money isn't included. I am also about to start childminding wich will boost my present income ( I hope!!). We had assumed that the rise in our income is going to mean we loose a lot of our working tax credit anyway so we hadn't really taken it into consideration.

God this is hard!

Getting the paperwork right in self-employed work is really one of the hardest things. Don't forget that you'll need to fill in a tax return after you start child-minding.