When we talk about investing our money for the future, we talk about the concept of diversification. This means not putting all our eggs in one basket, or rather, spreading the investments across a range of companies.

But diversification can also be applied to our income.

For most of us, we have one source of regular income from our work. And that source of income is subject to income tax and national insurance rules. The more we earn, the more tax we could potentially pay.

Could having more than one job help protect our income?

Let’s explore the general tax rules on income

Personal Allowance - tax-free earnings!

• Personal Allowance (2024-2025): £12,570. This is the amount of income you can earn before you start paying income tax.

• Reduction of Personal Allowance: If your income exceeds £100,000, your Personal Allowance is reduced by £1 for every £2 over this threshold.
  

Income Tax Bands - the more you earn, the higher the tax

• Basic Rate (20%): Applies to income over the Personal Allowance up to £50,270.

• Higher Rate (40%): Applies to income between £50,271 and £125,140.

• Additional Rate (45%): Applies to income over £125,140.
  

£100,000 Rule - can be more taxing than you realise!

• Income Over £100,000: For every £2 of income above £100,000, your Personal Allowance is reduced by £1. It is therefore effectively a 60% tax.

• Complete Removal: If your income reaches £125,140, you lose your entire Personal Allowance.

Let’s factor in National Insurance contributions.

Classes of National Insurance

Class 1

• Who Pays: Employees and employers.

• Employee Contributions:

• Primary Threshold: Earnings between £12,570 and £50,270 are taxed at 12%.

• Above Upper Earnings Limit: Earnings over £50,270 are taxed at 2%.

• Employer Contributions:

• Secondary Threshold: Earnings above £9,100 are taxed at 13.8%.

Class 2

• Who Pays: Self-employed individuals.

• Flat Rate: £3.45 per week.

• Small Profits Threshold: No contributions are due if profits are below £12,570, but contributions can be made voluntarily to maintain benefits.

Class 3

• Who Pays: Voluntary contributions.

• Flat Rate: £17.45 per week.

• Purpose: To fill gaps in your National Insurance record to qualify for benefits like the State Pension.

Class 4

• Who Pays: Self-employed individuals.

• Lower Profits Limit: Profits between £12,570 and £50,270 are taxed at 9%.

• Upper Profits Limit: Profits over £50,270 are taxed at 2%.

So we’ve established two forms of tax deduction that come off our salary before we get our take-home pay in the bank.

Tax rule 1: National insurance is calculated on a per-job basis

If you have more than one job, National Insurance Contributions (NICs) are calculated separately for each job. Here’s how the rules work:

Multiple Jobs and National Insurance contributions for Employees

1. Separate NIC Calculations: NICs are calculated separately for each employment. Each employer will calculate NICs based on the earnings from that particular job. Earnings from other jobs are not considered in the calculation.

2. Primary and Secondary Thresholds: The thresholds for NICs apply independently to each job.

• Primary Threshold: For the 2023-2024 tax year, you pay 12% NIC on earnings between £12,570 and £50,270 and 2% on earnings above £50,270 for each job.

• Secondary Threshold: Employers pay 13.8% NIC on earnings above £9,100 for each job.

Let’s look at an example comparing two scenarios with the same gross salary (before deductions)

Scenario 1:

Sarah is employed and earns £60,000 a year from her one job.

The income tax and national insurance deductions are:

Taxable Income:

• Total Salary: £60,000

• Personal Allowance: £12,570

• Taxable Income: £60,000 - £12,570 = £47,430

Tax Calculation:

• Basic Rate (20%): £50,270 - £12,570 = £37,700

• Tax: £37,700 x 20% = £7,540

• Higher Rate (40%): £60,000 - £50,270 = £9,730

• Tax: £9,730 x 40% = £3,892

• Total Income Tax:
  

• £7,540 (Basic Rate) + £3,892 (Higher Rate) = £11,432

National Insurance deductions

NIC Rates for Employees:

• Primary Threshold: £12,570

• Upper Earnings Limit: £50,270

• Above Upper Earnings Limit: Earnings over £50,270

NIC Calculation:

• Earnings up to Primary Threshold (£12,570): No NICs

• Earnings between £12,570 and £50,270 (12%): £50,270 - £12,570 = £37,700

• NIC: £37,700 x 12% = £4,524

• Earnings above £50,270 (2%): £60,000 - £50,270 = £9,730

• NIC: £9,730 x 2% = £194.60

• Total NIC:

• £4,524 + £194.60 = £4,718.60

Final Breakdown

• Gross Salary: £60,000

• Income Tax: £11,432

• National Insurance: £4,718.60

• Net Income: £43,849.40

Scenario 2:

Sophie also earns £60,000, but she is employed by two different employers. Her first employer pays her £50,000. Her second employer pays her £10,000.

Let’s run the numbers again.

To calculate income tax we are going to add together £50,000 and £10,000, because income tax is calculated as combined income across multiple jobs.

Tax Calculation:

• Basic Rate (20%): £50,270 - £12,570 = £37,700

• Tax: £37,700 x 20% = £7,540

• Higher Rate (40%): £60,000 - £50,270 = £9,730

• Tax: £9,730 x 40% = £3,892

• Total Income Tax:

• £7,540 (Basic Rate) + £3,892 (Higher Rate) = £11,432

So it’s the same amount of income tax as Sarah pays.

But for National Insurance contributions, we need to separate each of Sophie’s jobs.

Breakdown:

• Gross Salary: £50,000

• Earnings between £12,570 and £50,270 at 12%: £37,430

• Total NIC: £4,491.60

• Gross Salary: £10,000

• Earnings up to £12,570: £0 (since £10,000 is below the threshold)

• Total NIC: £0

Final Breakdown

• Gross Salary: £60,000

• Income Tax: £11,432

• National Insurance: £4,491.60

• Net Income: £44,076.40

This is because of the National Insurance rule that means each job’s national insurance contributions are calculated in isolation.

So if we think about the primary threshold, or earnings that we don’t pay national insurance on, we could technically have multiple jobs all paying less than this. If we did, we’d pay no national insurance at all.

Bear in mind national insurance contributions are important for building up state pension entitlement. But if you earn at least £6,397 a year, you will still build up qualifying years for your state pension and not pay any national insurance. Another little rule there to remember.

Tax rule 2: the trading allowance

The trading allowance is a tax-free allowance of £1,000 on earnings from self-employed work. So it can be a useful tax benefit for somebody with a combination of employed and self-employed work.

The trading allowance is a UK tax relief designed to simplify the tax affairs of small, casual, or hobby businesses. It provides an exemption from income tax for trading income up to a certain amount.

Here’s how it works:

Key Features of the Trading Allowance:

Allowance Amount:

• The trading allowance is £1,000 per tax year.

Eligibility:

• Individuals with trading income from self-employment, casual jobs, or miscellaneous income can benefit from the trading allowance.

• It applies to income from sole traders and partnerships but not to income already covered by another exemption or allowance.

Use of the Trading Allowance:

• Full Exemption: If your total trading income is £1,000 or less in the tax year, you don’t need to declare this income or pay tax on it.

• Partial Relief: If your trading income exceeds £1,000, you can choose to deduct the £1,000 allowance from your total income instead of claiming allowable expenses.

Claim the trading allowance OR deduct expenses:

• You can’t use the trading allowance in conjunction with claiming expenses. It’s an either/or situation:

• Deduct the £1,000 trading allowance from your total income.

• Claim actual business expenses if they are higher than £1,000.

Examples of Using the Trading Allowance:

Example 1: Income Below £1,000

• Total Trading Income: £800

• Use of Allowance: Since the income is less than £1,000, you don’t need to declare it or pay tax on it.

Example 2: Income Above £1,000 with Minimal Expenses

• Total Trading Income: £2,000

• Option 1: Deduct the trading allowance of £1,000.

• Taxable Income: £2,000 - £1,000 = £1,000

• Option 2: Claim actual expenses if they are higher than £1,000 (e.g., £1,200).

• Taxable Income: £2,000 - £1,200 = £800

How to Claim the Trading Allowance:

• Self-Assessment Tax Return: If your trading income is above £1,000, you need to declare it on your self-assessment tax return.

• Declaration: Use the relevant sections of the self-assessment form to either claim the trading allowance or deduct your actual expenses.

Things to consider:

• Multiple Sources of Income: If you have more than one source of trading income, the £1,000 allowance applies to the total income from all sources combined.

• Record Keeping: Even if your income is below £1,000 and you don’t need to declare it, it’s still advisable to keep records of your earnings.

The trading allowance is a useful tool for those with small-scale or casual income streams, simplifying tax calculations and potentially reducing tax liability

Again, let’s compare two scenarios.

1. Dave earns £50,000 a year from his one and only job

Taxable Income:

• Total Salary: £50,000

• Personal Allowance: £12,570

• Taxable Income: £50,000 - £12,570 = £37,430

Tax Calculation:

• Basic Rate (20%): £37,430 falls within the basic rate band.
  

• Tax: £37,430 x 20% = £7,486

National Insurance Calculation:

• Earnings up to the Primary Threshold: No NICs are due on the first £12,570.

• Earnings between the Primary Threshold (£12,570) and the Upper Earnings Limit (£50,270):

• Amount within this range: £50,000 - £12,570 = £37,430

• NIC: £37,430 x 12% = £4,491.60

Final Breakdown

• Gross Salary: £50,000

• Income Tax: £7,486

• National Insurance: £4,491.60

• Net Income: £38,022.40

2. Luke earns £50,000 from two jobs. His employer pays him £40,000 a year. And he earns £10,000 in self-employed income too.

Breakdown of income tax on £40,000 employed salary:

• Gross Salary: £40,000

• Personal Allowance: £12,570

• Taxable Income: £27,430 (subject to 20% income tax)

• Total Income Tax: £5,486

Breakdown of national insurance contributions on £40,000 employed salary:

• Earnings up to the Primary Threshold: No NICs are due on the first £12,570.

• Earnings between the Primary Threshold (£12,570) and the Upper Earnings Limit (£50,270):

• Amount within this range: £40,000 - £12,570 = £27,430

• NIC: £27,430 x 12% = £3,291.60

Breakdown of income tax on £10,000 self-employed salary:

• Trading Allowance: £1,000

• Taxable Income: £9,000 (subject to 20% income tax)

• Total Income Tax: £1,800

Breakdown of national insurance contributions on £10,000 employed self-employed salary:

• Gross Salary: £10,000

• Earnings up to £12,570: £0 (since £10,000 is below the threshold)

• Total NIC: £0

Final Breakdown

• Gross Salary: £50,000

• Income Tax: £7,286

• National Insurance: £3,291.60

• Net Income: £39,422.40

Other considerations

These calculations only consider income tax and national insurance.

You may get other benefits from forms of employment such as enhanced employer pension contributions (the legal minimum is 3%), tax-free benefits, additional allowances or expenses paid for. Bear these in mind when weighing up the pros and cons of having multiple jobs.

But from an income diversity perspective, having more than one form of income can also give you some peace of mind. In the event one source of income dries up, you’ll still have another to rely on.