When one job is more taxing than two!

As an accountant one of the most common questions we are asked by people is about tax on second jobs….

 

It is a common idea that you ‘get taxed more on a second job’. Now it may appear that way if you have ever had additional employment and you see the 20% basic rate tax being deducted from your wages on your payslip. However, if you were to do 40 hours split between two employments of 30 hours and 10 hours you actually have fewer deductions and therefore benefit more financially than somebody who works a 40 hour week in the same employment. So in fact you get LESS taken from your salary by HMRC by taking on a second job.

 

Each individual gets a tax free allowance per year -currently 10k a year (for 2014/15) shown as a tax code as 1000L. Everything above this is taxed at 20% until you get in to higher rate tax (to keep it simple we will ignore this for now).

 

The majority of full time employments utilise this allowance in full as they exceed 10k. Therefore, when a second job is taken on there is no more of the tax free allowance left and this income is taxed in full at 20%. If the additional income were to be incurred in the first job, say as overtime, the tax would be at the same rate. It is just less apparent due to the ratio of tax to income. This can be shown below:

 

	SINGLE EMPLOYMENT:					So the hours are the same, the   salary is the same, and the tax     deducted is the same.     It just looks like the second job   has been ‘heavily taxed’ due to   the tax in comparison to the full   time job.
		Salary per year	Tax Rate	Tax
	1st Job -30 hours per week	£  10,000	0%	£      0
	Overtime -10 hours per week	£     1,000	20%	£  200
	TOTAL	£  11,000		£  200
	TWO EMPLOYMENTS:
		Salary per year	Tax Rate	Tax
	1st Job -30 hours per week	£  10,000	0%	£      0
	2nd Job -10 hours per week	£     1,000	20%	£  200
	TOTAL	£  11,000		£  200

 

Now here’s how you may benefit from having a second employment….

In addition to tax there is also a deduction of employees national insurance (NI) and this is deducted at 12.8%. Similar to tax, you also have an allowance that is free of deductions – for NI this is currently £7,956 per year or £153 per week. The only difference with this is that it is per employment rather than per person. So if your second job does not exceed £153 then you will not be deducted NI on your earnings. So going back to the example shown above but now taking the national insurance in to consideration:

 

	SINGLE EMPLOYMENT
		Salary per year	Rate	Tax	NI	Total Deducted
	1st Job -30 hours per week	£  10,000	0%	£     0	£ 262	£    262
	Overtime -10 hours per week	£    1,000	20%	£ 200	£ 128	£    328
		£  11,000		£ 200	£ 390	£    590
	TWO EMPLOYMENTS
		Salary per year	Rate	Tax	NI	Total Deducted
	1st Job -30 hours per week	£  10,000	0%	£     0	£ 262	£    262
	2nd Job -10 hours per week	£    1,000	20%	£ 200	£     0	£    200
		£  11,000		£ 200	£ 262	£    462

 

So the single employment has an amount paid of £10,410 (£11k less £590 deductions) and for the two employments the net amount paid is £10,538 (£11k less £462 deductions) demonstrating how it may be beneficial to have two employments and opposing the idea that you get ‘taxed more on a second job’.

 

Now this is a basic calculation using simplistic figures (which are slightly below the national minimum wage but used for ease of understanding) and there are always other factors to consider. The above example is very general and this may not always be true depending on the number of hours worked and an individual’s own personal tax code which may not be the same as the standard (for various reasons) as well as other variables.

 

It is worth employers taking this into consideration to relay to potential employees who may be hesitant to take on employment under the illusion that they will be heavily taxed but also from the point of view that when employee national insurance is charged generally so is employers at 13.8%. Therefore several part time employees may be more beneficial financially than one full time employee. If you wish to know more about how Gain Accountancy can help you and your business please contact us on 01872 560326 or email info@gainaccountancy.co.uk