Don’t let your hard-earned profit slip through your fingertips. Learn how tax works when you have two jobs with this article.

Find out what taxes to expect on your income and follow our three-step process to make sure you’re paying everything you need to. Discover:

  • How tax is calculated on two incomes
  • How to manage your taxes from both jobs
  • How to simplify your income tax with Countingup

How tax is calculated on two incomes

HMRC collects income tax and National Insurance from your income in a variety of ways, depending on whether you’re employed or self-employed. Note that, you only have tax collected on the portion of your income that is above your personal allowance. This is currently placed at £12,570, meaning that, if you earn above this figure, you receive £1047.50 tax-free each month before any deductions are made. 

As someone who has two incomes, you’ll likely have a full-time job but have started a business on the side to earn extra income or as your next long-term career step. Depending on how you’ve set up your business, your tax may be calculated in two ways: 

PAYE on both incomes

If you are paid via PAYE (pay as you earn) on both incomes, you will have tax codes assigned to each of your employers by HMRC. For example, you have an employment contract with one limited company and are the director of your own at the same time. This is because company directors are considered employees of the company, even though they run it simultaneously.

These tax codes will indicate how much income you expect to receive from each income source. Then, as you get paid, tax is automatically collected from each of your paychecks according to the rates specified on your tax codes. Through this same system, you’ll also pay Class 1 National Insurance.

PAYE and Self-Assessment

Via an additional system, you may have to pay income tax through Self Assessment on top of your PAYE contributions. For example, you have an employment contract with a company and have registered as a sole trader to run your side business.

Like before, you’ll pay income tax and Class 1 National Insurance through the PAYE system from your full-time job. However, you’ll also pay income tax and Class 2 and 4 National Insurance from your business’s net profits by filing Self Assessment tax returns each year. Like before, your income tax will take into account your total income. Therefore, if your side business takes part of your total income into a higher tax bracket, you’ll pay the higher margin on the amount that enters this banding.

How your income tax may change

Tax codes and income tax bands vary slightly depending on where you live in the UK. For more information on how much tax you pay as an entrepreneur, read our articles Can you be employed and self-employed at the same time? and What taxes does a Self-Employed Person Pay?

How to manage your taxes from both jobs

  1. Make sure HMRC knows about both jobs

As previously mentioned, the first step in managing your taxes from two jobs is to let HMRC know about both of them.

If you receive income from two PAYE contracted positions (wherein you have an employment contract with one limited company and are the director of your own at the same time), HMRC will learn of both of your incomes when they assign your tax codes. This will already be handled at your full-time job by your HR department. Therefore, for your own company and income as a director, the first step is to set up a limited company, then register as an employer.

Alternatively, if you’ve chosen to be a sole trader, you’ll need to declare your new income source and register as a sole trader. Depending on your new business’ income, you may have access to a trading allowance. This is a business income allowance similar to your personal allowance, albeit lower. For more information on how this impacts you and your taxes, including when you may choose not to use it, read our article What is the trading allowance?

  1. Track your income and calculate your taxes

As a business, you’ll need to keep records of your trading performance, however, the level of detail will differ for each type of business.

As a sole trader

Sole traders must keep records of their income and expenses in order to calculate their tax returns, ideally in a  separate business current account. Although your PAYE tax from your job is deducted automatically, you’ll still need to keep records of your personal income to make sure your calculations are reliable.

As a limited company director

Your income as a limited company director will be tracked as you manage the PAYE records for your company and make payments to yourself.

However, if you pay yourself dividend income, you will need to keep records of when they’re issued and for how much.

  1. How to pay your tax while working two jobs

As a sole trader

Sole traders need to file Self Assessment tax returns after each tax year. Find out how to do this in our article How to pay Self Assessment tax

As your business grows to over £10,000 in annual profits, you’ll need to use accounting software like Countingup to file tax returns. Learn more about why in our article What is Making Tax Digital?

As a limited company director

Your tax liability as a limited company director will largely be paid from the PAYE payments you make to yourself.

If you issue yourself dividend income, you will need to use the Self Assessment system mentioned above.

How to simplify your income tax records with Countingup

Managing business finances can be stressful if you’re new to the business world. Stay tax compliant regardless of whether you run a limited company or operate as a sole trader with Countingup. 

Built for small business owners, the Countingup app is the two-in-one business current account and accounting software solution. The Countingup app automates time-consuming bookkeeping admin, giving you more time to focus on growing your business.

Countingup provides key business features like tax estimates from your trading and handy tools like automated invoicing and real-time profit and loss data. Similarly, because Countingup is a dedicated business current account, you can keep your business income organised and self-contained to not overpay on your taxes.

You can also share your live financial data instantly with your accountant from your app. 
Gain complete confidence in your new business’ financial records. Find out more about Countingup here and sign up for free today.