If you work full time, your employer makes all the necessary tax and National Insurance deductions for you, hopefully ensuring you pay the right amout of tax
However, if you earn money from any other source, as well as your main employer, this is classed by HM Revenue & Customs (HMRC) as a "additional income" and you will need to calculate, organise, and declare any extra income you receive.
You may earn an additional sum that has gone undeclared to HMRC. Usually, this is a genuine mistake as you may not have been aware that you were required to do so. If you’re a self-employed sole trader and earning above your trading allowance (£1,000) in additional work - and you have not informed HMRC - then you’re committing tax avoidance and HMRC isn’t always so understanding - and can penalise you for not disclosing your full finances.
Mike Parkes from GoSimpleTax has provided the below guide to the most common unreported sources of income.
What constitutes additional income?
Any taxpayer who has alternative revenue streams outside of their main employment is regarded as having both "employed" and "additional" income. Tax must be paid on any additional income; to calculate this, you must register with HMRC for a Unique Tax Reference and complete a self-assessment tax return.
If you work for somebody other than your employer, you’ll almost certainly be considered a "second income" earner and will need to inform HMRC as soon as possible.
Different types of second income can include:
- Freelance/contract work. Any earnings you make outside of full-time employment through freelancing or contracting must be declared via self assessment.
- State pension as well as withdrawals from your pension.
- Interest on savings. Tax on savings interest will also differ if you have other forms of income, although this will depend on how much you’re actually earning elsewhere.
- Property rental income.
- Selling property
- Investments. Dividend income in excess of £10,000.
- Sale of assets/items. Selling items on a regular basis to earn steady money is recognised by HMRC as being self-employed - be it over the internet or at a local market. Any money you receive from these transactions must be declared if your income before expenses is in excess of £1,000.
Income from property
If you own a property and decide to rent it out to another party, you will need to pay tax on these earnings if the income is in excess of £1,000.
There are exceptions. If you reside in your very own rental property and receive less than the Rent a Room Scheme threshold, you won’t pay tax. In fact, provided your tenant pays less than £7,500 a year, you’re able to claim tax-free allowance.
If you sell a property outright you may be liable to pay Capital Gains Tax.
Tips and commission
Income tax should be paid on all tips and commission, although the way in which you pay tax depends on the format of the tips and how they have been shared out.
Cash tips - when receiving cash tips, you’re required to pay tax but not National Insurance. If you file your own self-assessment tax return, you’ll be required to declare tips. If you work for an employer, HMRC estimates your earnings and collects tax through PAYE.
Card or cheque tips - employers will be responsible in this case, either by paying income tax through PAYE or pooling tips into a ‘tronc’. The ‘troncmaster’ then ensures tips are paid to each member of staff - with income tax being paid correctly.
Bonuses - commission and other bonuses are generally paid via PAYE, and yare liable for both tax and National Insurance. Cash-in-hand bonuses are illegal if the relevant contributions haven’t been deducted.
Income from savings
Your savings are largely covered by a Personal Allowance and your Personal Savings Allowance. The former - your tax-free Personal Allowance (that is, the amount of income which you don’t need to pay any tax on) - is currently set at £12,570, and the Personal Savings Allowance allows for up to £1,000 (depending on your income tax band).
Any income from savings interest that’s over your allowance will be taxed at your usual rate of income tax. If you’re self-employed, then you’ll need to report the accrued extra interest within your self-assessment tax return. For employees, this is paid automatically through a change in your tax code.
Foreign income means any income from outside the UK. For example, if you work abroad, have foreign investments or rental income on overseas property, you may need to pay UK income tax, depending on whether or not you are classed as a UK resident and where you are domiciled. It is your responsibility to declare any relevant foreign investment and property earnings to HMRC, again via your self-assessment tax return.
Of course, this is not an exhaustive list. There are additional forms of income which can go unreported, costing you a significant penalty. These include income from trusts, dividends and peer-to-peer loans.
How can I declare a second income?
Extra income should be declared on your self-assessment tax return. You can find more information about how to declare a second income on the GOV.UK website.
Written by Mike Parkes, technical director, GoSimpleTax.