Second Job Tax – Understanding the Issues

In today’s ever-evolving job market, it’s becoming increasingly common for individuals to take on additional employment to supplement their income. Whether due to the changing economic landscape or personal financial goals, holding more than one job presents unique challenges and opportunities, especially when it comes to managing your tax obligations. Navigating the complexities of tax, National Insurance, and benefit considerations becomes paramount to ensure you’re neither overpaying nor underpaying your dues.

When gaining a second job – Tax, National Insurance, and Benefit issues are all things you need to be aware of. If you’re already employed by an employer, you will already have been added onto their PAYE system.

Tax-Free Personal Allowance

You only have one free personal allowance per tax year and the number of jobs you have does not affect this. 

In 2021/22, the personal allowance is £12,570. The PAYE system is designed to:

• Treat one job as your primary employment against which your personal allowance will be given in full
• Treat the other job as secondary where they are taxed at the basic rate of 20%

This means that you should see a code number of 1257L (reflecting a tax-free personal allowance of £12,570 for the tax year 2021/22 with the last digit removed and a letter added) against one job and a BR (basic rate) code against the others.

Most people pay tax at 20% (you would have to have a total income of over £50,270 in 2021/22 to pay tax at any more than 20%), so the system outlined above helps ensure that you will not underpay tax. However, this system sometimes falls down if HMRC are not aware that you have multiple employments. If so, then you may be given the tax-free personal allowance more than once meaning you won’t have paid enough tax.

How to Prevent Incorrect Second Job Tax

Make sure HMRC knows you have more than one job by always giving your new employer HMRC’s starter checklist (you will not be able to give them a P45 when taking on an extra job). Even when you have told HMRC about your circumstances, you should ensure you check your PAYE coding notices carefully.

In line with the PAYE system, you may find that if you have more than one job then you might overpay tax if the earnings from your main job are less than the personal allowance. In this situation, you will have paid an additional 20% tax on top of your other income. If this happens to you, you will probably have to wait until the end of the tax year to ask HMRC for a refund. Alternatively, you can wait for HMRC to carry out their tax year-end reconciliation process. In which case you should be sent a P800 tax calculation and a repayment in July/August after the end of the tax year.

In addition to paying income tax from your salary you will also have to pay National Insurance contributions. National Insurance contributions are a tax that pays for state benefits. Unlike your annual personal allowance, National Insurance is calculated in a different way. There is no allowance for individuals, and instead, everyone must pay National Insurance on every job where you are over the age of 16 (but under the state pension age) and are paid at least £183 per week. This National Insurance threshold is applied to each job you may have and does not usually take into consideration your total earnings across multiple employments. This means that you can easily underpay or overpay.

If you are considering taking on a second job, it is important to know your rights and responsibilities when it comes to paying tax. For more information and assistance with salary or dividends, please contact us.