Contractors’ Questions: How to pay tax on a 'one-off' IT contract?

Contractor’s Question: Similar to me, my wife works in IT but she’s full-time whereas I’m contract. That said; she’s just taken on and completed her first bit of freelance computer work (raking in just under £1,000), while still on her employer’s payroll.

So how should she declare the work for tax purposes? Can she get away with a short tax return, or can we even choose not to declare the earnings to the taxman? And will her current employer find out about her foray into IT contracting from HMRC?

Expert’s Answer: Your wife should report the income from her freelance work on a personal tax return. If your wife does not already file one of these, she should contact HM Revenue & Customs to advise them that she has received this income and ask that they register her for self-assessment.

HMRC will then issue her with a reference number to allow her to file a tax return (which can be done with the help of an accountant or online using HMRC’s free software).

Dates and documents to mark

Assuming her freelance work was done in the current tax year (which started on April 6^th 2011), then the income needs to be reported on the tax return for the year ending April 5^th 2012, which needs to be filed online with HMRC prior to January 31^st 2013. This return will need to include all of her other income, including her employment income (she can use your P60 form to obtain the information which needs to go on the personal tax return).

One-off, or not?

Your wife should consider whether this is a one-off receipt or is the start of a freelancing/contracting business which will receive more income in the future. This will determine whether any national insurance is due. If this is a one-off then it can be reported as “other income” on the tax return which will trigger a personal tax liability.

However if it represents the first invoice raised by a new business and it is anticipated that more income will be generated, then it needs to be reported as self-employment income, which will result in a Class 4 national insurance as well as personal tax - and she will also need to commence payment of Class 2 national insurance.

She may be pleased to know…

More positively, as she is already in employment she may be able to defer the national insurance contributions dependent upon the level of her employment income. She may wish to speak to an accountant about this.

Finally, her current employer will not be notified by HMRC about this income or be able to find this out from HMRC.

The expert was Martin Hesketh, managing director of Brookson, a tax specialist for contractors and the self-employed.