- If you've got multiple streams of income,
be it two streams or more,
there's no doubt you will want to know how
the tax deductions work for you in a given tax year.
After all you work hard for your incomes
and the last thing you want to do is allow the tax man
to take more than an optimal and fair share of your income,
simply because you're not in the know.
In this video,
we will cover what exactly do we mean by
multiple streams of income?
What are the most common income streams
in my experience here in the UK?
And finally,
how does the income tax regime work
when you have multiple income streams
with a numerical worked example?
Before I get into today's video,
be sure to visit our
Accounting and Tax Academy membership area.
Where you can get access to exclusive in-depth courses,
templates and calculators that will help you forecast
and predict your tax and national insurance liability
for the tax year ahead.
(upbeat music)
There are perhaps two methods you can earn incomes from,
that is actively or passively.
Active income is essentially an exchange of your time
in return for a wage, salary or fee.
It is the most popular way of earning an income,
especially through PAYE that is Pay As You Earn employment
here in the UK at least.
Passive income for want of a better phrase
is what you earn whilst you sleep.
You don't necessarily need to exchange your time
for this type of income.
Although it's still probably needs some effort
in setting up and monitoring.
Multiple income streams can be generated
in a number of ways.
And here in the UK,
the most common types of income generated, in my experience,
is as follows:
income from PAYE employment,
income as a self-employed freelancer,
as a self-employed tradesperson,
like an electrician or plumber, for example,
income as a limited company or umbrella company contractor
by way of a dividends in the main,
income from interest on savings,
dividend income from investments in shares
and other types of investment income,
rental income from property
and finally pensions income.
Note that in this video, the focus is on taxable income,
subject to Income Tax Act of 2003, 2005 and 2007,
and not money generated from an increase in wealth.
Well, what do I mean by this?
Well, for example,
if you bought a property, developed it and sold it for,
let's say, a profit of £100,000,
this is taxable, yes,
but it is classified as a capital gain, not an income.
The same goes for selling shares for a profit,
trading income or even selling a business.
(upbeat music)
Traditionally PAYE employment income,
self-employment income and property rental income
were the most common types of income earned
by UK tax residents.
But a lot has changed in the last decade or so.
Now, income from e-commerce trading,
YouTube Ad sends, affiliate deals, blog writing,
and other digital and tech based gigs
have become very popular
and all these and are now being done as side hustles,
that is in addition to your employment
or self-employment bread and butter income,
but by far the most common combinations of income
or shall I say multiple streams of income again,
in my experience, is as follows:
employment, PAYE income and property rental income,
self-employment freelancer
or limited company contractor income
and property rental income,
and finally, employment PAYE income
and e-commerce trading income.
Now these are just three different combinations
we have measured through our own client services,
but these are by no means exhaustive.
Let me know in the comments below what combinations
of income you are earning at present.
(upbeat music)
It's certainly not a walk in the park
generating and maintaining multiple streams of income
and consistently.
However, once you are at this point,
you will certainly want to be smart about how much
all of this income you get to keep
as your own disposable income
and how much ultimately the tax man takes.
So follow this next section carefully as here is how
all your different streams of income are taxed.
This diagram on screen illustrates
the order in which income is taxed.
The first type of income is called non-savings income.
That is income from your employment PAYE,
self-employment, rental income and pensions in the main.
The next section is interest income from savings
that are not part of a tax shield like an ISA.
And finally,
the top size of income is dividend income.
Let's call this our income tax scalometer.
For a reminder of the current income tax bands,
rates and allowances,
download our comprehensive guide
that we will be referring to.
As always, this concept is best explained with an example.
Meet Harry,
a web designer and UX expert who is employed full-time
on PAYE and earns £35,000 per year, gross.
That is before any tax or national insurance is deducted.
Harry also has other or multiple sources of income
as follows:
he receives a taxable profit of £12,000 a year
from property rental income.
There are savings interest income of £2,500 per year.
He also does some side hustles in his own time
as a self-employed person and earns a taxable profit
of about £10,000 a year from these.
And finally,
he has a 50% share in his wife's limited company
and receives about £20,000 a year in dividends
from this company.
So let's take a look at Harry's tax calculation
using the 2020 to 21 tax rates.
The lowest slice of his income is his
PAYE employment income, that is £35,000
and then comes his self employed income of £10,000.
And then his property rental income of £12,000.
Next is his savings income of £2,500 per year.
And finally his dividend income of £20,000.
All in all his total gross income is £79,500
for the tax year.
Harry gets the personal tax allowance of £12,500
for the year deducted from the total gross income,
leaving a taxable income of £67,000
as can be seen on the income tax scalometer.
Now, once the tax calculation itself,
you can clearly see that the calculation is computed
in the three different sections.
That is non-savings income,
savings income and finally dividend income.
Why?
Because each type of income
has different income tax rates applicable.
Firstly, the non-savings income consists of
Harry's employment income,
self-employed profits and rental profits,
all totaling £57,000.
The personal allowance is allocated
against this section of income.
So that leaves a taxable amount of £44,500.
And 37,500 of this
falls into the basic income tax rate band,
hence taxed at 20%.
The remainder is taxed at 40%
as it falls into the higher rate tax band.
Because Harry's non-savings income
has already breached the higher rate threshold,
for his savings interest income
there is a tax-free allowance of £500
for higher rate taxpayers
and the rest of his £2,500 of interest savings income.
That is 2000 is taxed at the higher rate, which is 40%.
And finally, when we get onto Harry's dividends,
he receives a £2000 dividend allowance
and the rest is taxed at the upper dividend rate
of 32.5% as he is now a higher rate tax payer.
There's also a small amount of Class 4 National Insurance,
as a result of Harry's self-employed income.
For the sake of simplicity,
we are ignoring Class 1 employees National Insurance
in this example.
Now, to illustrate clearly how multiple streams of income
can impact your tax bill,
let's suppose Harry's PAYE income of 35,000 did not exist.
Now, the total income received is £44,500
of which 22,000 is non savings income,
2,500 savings income and finally,
20,000 is dividends income.
Let's apply these numbers again
and work out the tax on each section.
All of a sudden the tax bands and rates apply
change for each stream of income.
But savings interesting can the tax-free amount
now increases to £1000 from £500
as Harry's savings income now fall
within the basic rate tax bands.
The rest of it is taxed at
the basic rate of income tax of 20%.
Harry still gets the £2000 dividend allowance
but the big difference is now the remaining
18,000 of dividends are taxed at 7.5%
the ordinary rate of dividend tax.
The main takeaway for you
with regards to multiple income streams and taxation
is knowing what type of income gets taxed when
and at what rate.
Use the income tax scalometer for non savings,
savings and dividend income.
And what's more?
One of the things you can do
to control your tax bill for the year
is to control your total income where possible.
In Harry's scenario, he could have asked his wife
not to have paid him a dividend of £20,000
and perhaps defer the payment of this
until the next tax year.
And that it is the case for many limited company,
contractors, freelancers, and tradespeople.
You can control your salary and dividend income
and thus control to a certain extent
your tax bill for the year.