A weekend trade, freelance evenings, a shop on the side. Running a business alongside a job is ordinary, and the tax is not complicated once you see the shape of it. What it is, though, is counter-intuitive — and the two things people get wrong cost real money in opposite directions. One makes the January bill bigger than expected. The other means paying National Insurance that was never due.

All figures below are for the 2026/27 tax year, which runs from 6 April 2026 to 5 April 2027.

Two income sources, one tax return

Your employer deals with the job through PAYE: income tax and National Insurance come off the payslip before you see the money. Your self-employed profit goes through Self Assessment.

The return is not a second, separate tax bill. It pulls in both sides — your employment income and tax deducted, taken from your P60, and your self-employed profit — works out the total tax due on the lot, then gives you credit for the PAYE already paid. You settle the difference. Nothing is taxed twice. But the total is calculated on everything together, and that is where the first surprise lives.

Surprise one: your side income is taxed at your top rate, from the first pound

The £12,570 personal allowance is yours, not one per income source. Your job normally uses all of it through your tax code, which means your self-employed profit is taxed from pound one — at 20% if your combined income stays under £50,270, and at 40% on anything above that.

So side income is never taxed "afresh". It stacks on top of the job and is taxed at whatever rate you have already reached. Someone earning £48,000 in a job can find part of their side profit taxed at 20% and the rest at 40% in the same year.

Worked example — illustrative figures. Ryan earns £38,000 in a job and makes £14,000 profit from weekend joinery work.
• His job uses the personal allowance, so PAYE has already taxed £25,430 at 20%.
• His side profit sits on top of £38,000. The 20% band runs to £50,270, so £12,270 of profit is taxed at 20% = £2,454.
• The remaining £1,730 crosses into higher rate at 40% = £692.
• Income tax on the side business: £3,146.
Ryan's mental model was "20% of £14,000, call it £2,800". The real figure is 12% higher because the last slice of his profit tipped him into the 40% band.

Surprise two: Class 4 National Insurance has its own £12,570 floor

This one runs the other way, and it is worth money.

Two kinds of National Insurance are in play. Class 1 comes off your salary: 8% on earnings between £12,570 and £50,270 a year, then 2% above that. Class 4 is charged on self-employed profits: 6% between £12,570 and £50,270, then 2% above.

Here is the part almost everybody assumes wrongly. Unlike the personal allowance, the £12,570 Class 4 lower profits limit is not shared with your job. It applies to your self-employed profits in their own right, however much you earn in employment.

Ryan again. Profit £14,000.
• Class 4 is charged only on profit above £12,570: £1,430 × 6% = £85.80.
• Class 2: profits of £14,000 are above the small profits threshold of £7,105, so Class 2 is treated as paid and his state pension record is protected without a payment. Below £7,105 he could pay voluntary Class 2 at £3.65 a week to keep the record intact.
• Total due through Self Assessment: £3,146 + £85.80 = £3,231.80, which is 23% of his side profit.
Had the £12,570 floor been shared with his job, Class 4 would have been £840 rather than £85.80.

Our National Insurance guide for sole traders covers the classes in full, including the years where paying voluntarily is the right call.

The annual maximum, and why nobody defers any more

If you earn well in both, you could in theory pay main-rate National Insurance twice on the same band of income. An annual maximum prevents that. Where your employment earnings have already used up the main-rate band, the calculation restricts your Class 4 so that the 2% rate applies to your profits instead of 6%.

Worked example — illustrative figures. Sarah earns £62,000 in a job and makes £20,000 profit consulting.
• Class 1 on the salary: £37,700 at 8% = £3,016, plus £11,730 at 2% = £234.60. The full 8% band is used up.
• Class 4 at the main rate would be £7,430 at 6% = £445.80.
• Because the main-rate capacity is already spent, the annual maximum leaves £7,430 at 2% = £148.60.
• She keeps £297.20 that a naive calculation would have handed over.
Her income tax is a different story: all £20,000 of profit sits above £50,270, so it is taxed at 40% — £8,000. Add the £148.60 and her Self Assessment bill is £8,148.60, just over 40% of the profit. That is the set-aside percentage she needs, not 25%.

One important change to know: advance deferment of Class 4 was withdrawn from the 2015/16 tax year. There is no form to send in beforehand. The annual maximum is now worked out inside the Self Assessment calculation itself — which only happens correctly if the return actually reports your employment earnings. Leave the employment pages blank and you will quietly overpay.

The £1,000 trading allowance and the trap in it

If your gross self-employed income is £1,000 or less in a tax year, you generally do not need to tell HMRC about it at all. Above £1,000 gross you must register for Self Assessment, but you can still deduct a flat £1,000 instead of your actual expenses if that produces a better answer — useful for anything with low costs, such as tutoring or consultancy.

The trap is that the trading allowance cannot be used against money from your own employer, or from your spouse's or civil partner's employer. The rule exists to stop a job being repackaged as freelancing for the same firm. If your side work is for the company that already employs you, the allowance is off the table — and the more serious question is whether that arrangement is self-employment at all rather than employment under another name.

Losses can cut the tax on your job

A side business that loses money in its first year is not just a write-off. A trading loss can be set against your general income of the same tax year or the previous one, which for an employee means it reduces the tax on your salary and can produce a genuine PAYE refund.

Two boundaries matter. There is a cap on this relief of £50,000, or 25% of adjusted total income if that is higher, which is far above most side businesses. And the trade must be run on a commercial basis with a view to profit — a hobby that happens to cost money does not qualify.

Worth knowing: losses calculated under the cash basis could not be used this way for the years 2013/14 to 2023/24. That restriction no longer applies, so cash basis losses can now be relieved against general income. Since the cash basis is the default for most sole traders, this quietly turned a dead loss into a live claim for a lot of people. Our post on cash basis versus accruals explains which basis you are actually on.

Payments on account: whether they hit you depends on the split

Once your Self Assessment bill exceeds £1,000, HMRC normally asks for next year's tax in advance in two instalments — 50% on 31 January alongside the balancing payment, and 50% on 31 July.

There is a second exemption people with a job often assume covers them, and often it does not. You escape payments on account if more than 80% of your tax was collected at source, for example through PAYE. Whether that applies is pure arithmetic.

Ryan's first January — illustrative. PAYE collected £5,086 of income tax. His Self Assessment adds £3,146. That is £8,232 of income tax in total, of which PAYE covered 62% — comfortably under 80%, so payments on account apply.
• 31 January: £3,231.80 balancing payment plus £1,615.90 first payment on account = £4,847.70.
• 31 July: £1,615.90.
He set aside 23% of his profit and needed nearer 35% to cover that first January. This is the single most common cashflow shock for people with a job and a side business, and the full mechanics are in our post on payments on account.

There is a useful alternative if your bill is small. If you owe less than £3,000, already pay tax through PAYE, and file online by 30 December (or on paper by 31 October), HMRC can collect the bill through next year's tax code instead of demanding it in one lump on 31 January. You are still paying it, just spread over twelve months of payslips.

Making Tax Digital counts your profit, not your salary

Making Tax Digital for Income Tax started on 6 April 2026 for sole traders and landlords with qualifying income over £50,000, drops to £30,000 from 6 April 2027 and £20,000 from 6 April 2028.

Qualifying income means gross income from self-employment and property. Employment income is not counted. So a £70,000 salary with £9,000 of freelance turnover is nowhere near MTD, while a £25,000 salary with £55,000 of freelance turnover was in scope from April 2026. People routinely get this backwards in both directions. Our MTD guide sets out what being in scope actually involves.

Your checklist for this week

  1. Add up your gross side income for the tax year so far. Under £1,000 and there is nothing to do. Over it, you need to register.
  2. Register by 5 October following the end of the tax year you started in — the deadline for the 2026/27 tax year is 5 October 2027. Registration is a one-off. The registration walkthrough takes about ten minutes.
  3. Work out your real marginal rate. Add your salary to your expected profit. Under £50,270 the top slice is taxed at 20%; over it, 40%. That is the number your set-aside should be built on.
  4. Set aside on the right basis. Roughly 25% of profit if all your income stays inside the basic rate band, and roughly 42% on any profit sitting above £50,270 once Class 4 is included.
  5. Add half again for the first January if payments on account will apply — check whether PAYE covers more than 80% of your total income tax, and assume it does not if your side profit is more than about a quarter of your salary.
  6. Open a separate account for the side business. It costs nothing and turns a year of untangling into an afternoon. We explain why in our piece on the free Mettle account.

How we make it simple

This is a large share of our client base: a good job and a business that started as a favour for someone. We reconcile the P60 against the self-employed profit so the annual maximum is applied and no National Insurance is overpaid, use the trading allowance where it beats real expenses, tell you the payments-on-account figure in advance rather than in January, and claim early losses against your salary where the trade qualifies. From £19 + VAT a month. Get started.