As a solo proprietor or partner, do you now work outside of your day job and pay taxes and national insurance on the income you generate? If this is the case, you would be required to file a self-assessment tax return to report the additional income and be considered self-employed.
Paying tax on a side hustle
You may have to pay Class 2 and Class 4 national insurance payments via your self-assessment tax return, but this is only after considering the contributions you’ve previously made on your wage.
National insurance premiums for anyone earning more than £6,515 a year will be £3.05 each week (£158.60 per tax year) as of the end of the current fiscal year (2021/22).
An additional 2 per cent of earnings beyond the threshold of £50,270 will be subject to the Class 4 national insurance rate of 9 per cent.
As of April 2022, the rate for Class 4 national insurance will rise by 1.25 per cent.
If you have a second source of income, you will be taxed at your marginal rate, just as you would if it were your primary source of income. You won’t have to pay Class 2 and 4 national insurance or income tax until the end of the tax year, 31 January 2023 for earnings up to 5 April 2022.
What if you’re a landlord?
Renting out a home, making additional investment income, and realising capital gains, such as selling real estate, valuables, or stock, are all examples of secondary sources of income. Sole proprietorship and partnership revenues are taxed differently in this situation.
Class 2 and 4 national insurance payments do not apply to rental income from property you own directly. You would still be subject to income tax at the marginal rate, the same as self-employment income. It is necessary to disclose any rental earnings in the following ways:
Between £2,500 to £9,999, after deductibles and other fees,
a minimum of ten thousand pounds before deductible expenditures
The self-assessment tax return includes a section for rental income.
What if you have investment income?
Other investment income, like dividends or interest, may also need to be declared if the amount received exceeds either the dividend allowance (currently £2,000) or the personal savings allowance (£1,000 for the basic rate taxpayer, £500 for higher rate taxpayer or zero for additional higher rate taxpayer). So, like with other earnings, interest would be taxed at your marginal rate as long as it is earned. On the other hand, Dividends are taxed at a lower rate, although that rate will rise by 1.25 per cent beginning in April 2022.
Capital Gains Tax
Capital gains are taxed differently than other income, such as earned, invested, or rented income, and are reported on a tax return in their own right. Taxes on capital gains vary based on the kind of asset or stock sold, as well as how much money you make from other sources. After deducting the yearly exemption of £12,300 (for 2021/22), capital gains taxes might be levied at 10%, 18%, 20%, or 28%, depending on the circumstances.
For HMRC to send you a tax return to fill out, you must first sign up for self-assessment. All of this may be done online. If you like, you may also register by phone or on paper.
Putting money aside to cover any tax or national insurance obligations due in January is easier if you finish your tax return as early as possible in the tax year.