I’m Self Employed but on PAYE Too How Do Taxes Work

This guide explains how taxes work if you are self employed and on PAYE at the same time including how HMRC calculates tax, National Insurance, and Self Assessment.

More people in the UK now have more than one source of income. It is common to be employed through PAYE and also run a self employed business. You might have a part time job and freelance in the evenings, run a small business alongside full time work, or receive PAYE income while doing occasional contract work as a sole trader. Having mixed income streams is completely allowed but it does change how tax and National Insurance are calculated.

The good news is that the UK tax system is designed for people with both PAYE and self employed income. You simply need to understand how the two systems interact, how to complete Self Assessment, and how HMRC calculates tax across different income types. In my opinion once you understand the process it becomes straightforward even if the first year feels confusing.

This guide explains exactly how UK taxes work when you are both self employed and on PAYE, how to register, what records to keep, how National Insurance works, how payments on account are calculated, and the steps you need to take to stay compliant.

Understanding the Two Income Streams

If you are self employed and employed at the same time you effectively have two different income sources.

PAYE income

This is your job income. Your employer deducts:

  • Income Tax

  • Employee National Insurance

  • Student loan repayments if applicable

  • Pension contributions if enrolled

  • Other deductions such as AEOs if relevant

Everything is taken before your wages reach your bank account.

Self employed income

As a sole trader you:

  • Invoice clients

  • Receive income directly

  • Pay your own tax and National Insurance

  • Keep records and receipts

  • Declare profit on your Self Assessment tax return

Your self employed earnings do not go through PAYE automatically. You are responsible for reporting and paying the tax yourself.

The key thing to understand is that HMRC looks at your total income from both employment and self employment when calculating your tax for the year.

Do I Need to Register as Self Employed

Yes. If you earn more than £1,000 in gross self employed income in a tax year you must register for Self Assessment.

You can do this via GOV.UK. Registration ensures HMRC knows you have both PAYE employment and sole trader income.

If you earn less than £1,000 you can use the trading allowance and may not need to register although some people choose to register anyway for tax planning purposes.

How Your Tax Is Calculated When You Have Both PAYE and Self Employed Income

The PAYE system collects tax on your employment income. Self Assessment calculates the additional tax owed on your self employed profit. HMRC combines the two to calculate your total tax liability.

Step 1: Your employer deducts PAYE

Your employer deducts Income Tax using your tax code. That tax is allocated against your personal allowance.

Step 2: You calculate your self employed profit

Profit is income minus allowable business expenses.

Step 3: You enter both incomes on your Self Assessment

You report:

  • Employment income (from your P60 or P45)

  • Self employed profit

  • Any benefits or other taxable income

Step 4: HMRC works out your total tax

HMRC adds:

  • Employment income

  • Self employed profit

The combined total determines:

  • Whether you stay in the basic rate band

  • Whether you move into higher rate tax

  • Whether you lose some or all of your personal allowance

Step 5: PAYE tax already deducted is credited

You then only pay tax on what has not already been collected through PAYE.

Step 6: You pay any remaining tax through Self Assessment

This is due by 31 January.

A simple example

  • Your salary: £24,000

  • PAYE tax deducted: correct for that salary

  • Self employed profit: £10,000

  • HMRC combines the two: £34,000

  • You move into basic rate tax

  • You pay tax and Class 2 and Class 4 National Insurance on the £10,000 profit

PAYE does not tax your self employed income. It only covers your job. Everything else is sorted through your tax return.

How National Insurance Works When You Are Both Self Employed and Employed

This is where many people get confused because National Insurance has different classes.

From employment

Your employer deducts Class 1 National Insurance from your salary.

From self employment

You may pay:

  • Class 2 NI: a small weekly flat rate

  • Class 4 NI: a percentage of self employed profits

So you may pay Class 1 and Class 2 and Class 4 NI in the same year. This is normal.

Class 2 gives you access to State Pension rights if you do not earn enough through PAYE to qualify. Class 4 is a profit based charge.

HMRC works this out automatically when you complete your tax return.

How the Personal Allowance Works When You Have Two Incomes

You only get one personal allowance each tax year, not one per income stream. Normally your personal allowance is used up by your PAYE job because that income is taxed first.

This means your self employed profit is usually taxed from the first pound of profit because the personal allowance is already used up.

Example:

  • Personal allowance: £12,570

  • PAYE income: £15,000

  • Self employed profit: £5,000

Income taxed through PAYE already uses your personal allowance. The £5,000 profit is fully taxable.

This is normal and often surprising to new sole traders.

What Expenses Can Be Claimed Against Self Employed Income

You can reduce your tax by claiming allowable business expenses. These include:

  • Phone and internet used for business

  • Travel for work

  • Equipment

  • Software

  • Marketing costs

  • Training related to the business

  • Use of home for business

  • Subscriptions

  • Tools and materials

  • Accounting fees

You only pay tax on your profit not your total turnover.

If your job and your self employed business overlap you must only claim expenses for the self employed side. For example you cannot claim travel to your PAYE job. HMRC checks this.

What Records You Must Keep

You should keep:

  • Invoices

  • Receipts

  • Bank statements

  • Mileage logs

  • Expense records

  • Accounting software logs

  • Copies of P60s and P45s

HMRC requires records for at least five years.

How Payments on Account Work if You Are Self Employed and Employed

Payments on account are advance tax payments towards your next tax bill. You only pay these if:

  • You owe more than £1,000 when your return is calculated

  • You have not already paid 80 percent of your tax through PAYE

If your self employed profit is small or your PAYE job already covers most of your tax you may not need payments on account.

Example of payments on account

You owe £1,800 in tax for the year. PAYE covered £800 and you owe £1,000 for self employment.

HMRC will ask for:

  • £1,000 balancing payment

  • £500 first payment on account

  • £500 second payment on account

These payments can feel heavy in the first year but they reduce the next year’s bill.

Do I Need an Accountant if I Am Both Self Employed and on PAYE

Not always but many people choose to because mixed income makes Self Assessment more complicated.

An accountant can help by:

  • Ensuring expenses are claimed correctly

  • Preventing overpayment of tax

  • Helping with National Insurance

  • Advising on whether to incorporate later

  • Ensuring student loans and tax codes are handled correctly

In my opinion even a one-off Self Assessment review can be helpful if you are new to self employment.

What Happens to My Tax Code When I Am Self Employed and Employed

Your tax code will still relate only to your PAYE job unless:

  • You ask HMRC to collect some of your self employed tax through your tax code

  • HMRC decides to adjust your code after your tax return

Most people prefer not to have self employment tax deducted through their tax code because it reduces take home pay unpredictably.

If HMRC adjusts your code and you do not want this you can contact them to change it.

How Refunds Work When You Have Two Income Streams

You might receive a refund if:

  • Your PAYE job deducted too much tax

  • You started or stopped work mid year

  • Your self employed profit is lower than expected

  • You paid payments on account and your next year’s tax was lower

Refunds are paid directly into your bank account after submitting your tax return.

Common Mistakes People Make When They Have Both PAYE and Self Employed Income

These are the issues I see most often:

  • Assuming PAYE covers all tax automatically

  • Forgetting to register for Self Assessment

  • Not putting aside money for tax

  • Failing to claim allowable expenses

  • Mixing personal and business bank transactions

  • Not understanding payments on account

  • Not reviewing their tax code

  • Filing returns late

Most problems happen because people assume their employer will handle everything which is not the case.

How to Budget for Tax When You Are Self Employed and Employed

A simple approach is to set aside:

  • 20 percent of your profit if you are a basic rate taxpayer

  • 40 percent if your total income pushes you into higher rate tax

Setting aside money monthly or using a separate savings account makes tax time much less stressful.

Real UK Examples

Example 1: Full time employment with part time freelancing

Jane earns £28,000 through PAYE and makes £6,000 profit from freelancing. Her salary uses her personal allowance. Her self employed profit is taxed at the basic rate. She pays Class 2 and Class 4 NI on her profit. No payments on account are due because her PAYE job covers most of her tax.

Example 2: Someone with two part time PAYE jobs and a small business

Tom works two PAYE jobs totalling £15,000 then earns £12,000 profit from his craft business. PAYE only covers some tax. His total income is £27,000 so he pays tax on the profit and must make payments on account.

Example 3: High earner with small self employed income

Sarah earns £55,000 through PAYE and earns £5,000 profit from tutoring. This income pushes her further into higher rate tax. She must pay 40 percent on the £5,000 and Class 2 and Class 4 NI.

Each scenario is different but the process is the same.

Final Thoughts

Being both self employed and on PAYE is completely normal in the UK but you need to understand how the two systems interact. PAYE covers your job. Self Assessment covers your self employed profit. HMRC then combines both income streams to calculate the correct tax. National Insurance is handled separately for both roles. You may also be required to make payments on account.

In my opinion the most important habits are keeping good records, checking your tax code, and setting aside money for tax. Once you understand the rules and how HMRC calculates mixed income you can work confidently without surprise tax bills.