Understanding Your Side Hustle Tax UK: Navigating Extra Income Tax

Knowing how that income affects your taxes is crucial when your side hustle starts paying off. ‘Side hustle tax’ isn’t just a buzzword—it’s a reality you must address. Will you owe taxes, and how do you handle them?

This article includes the essentials of tax thresholds, how to report your earnings, and methods to minimise what you owe legally. Prepare to tackle tax season confidently, armed with the knowledge to keep your side hustle financially sound.

Key Takeaways

• If your side hustle earnings exceed £1,000 in the UK, you’ll need to pay tax on the profit, so keep detailed records to determine your tax liability correctly.
• You must choose between claiming the tax-free trading allowance and deducting expenses when calculating your tax, and if you earn enough, register for tax as a side hustler by 5th October following the relevant tax year.
• Accounting for multiple streams of income, allowable expenses, and managing potential tax benefits can be complex; dedicated accounting software can help streamline financial management and ensure compliance.

What has changed in Side Hustle Tax?

Nothing has changed. The rule has always been that income tax is paid for earnings over £1000 for any side hustle. The change that has come. The reality is that there hasn’t been a change in the side hustle tax threshold; it remains at £1000.

However, there has been a significant change in the responsibility of digital platforms such as eBay, Etsy, Vinted, and Airbnb. These platforms must now report online sellers’ information to HMRC.

Platforms are required to gather specific seller details, such as accurate identification and location, along with earnings on the platform over a year. This information is also shared with the sellers themselves.

This new shift in responsibility aims to ensure that all side hustle income is accurately reported and taxed, keeping everyone on a fair playing field.

Deciphering Side Hustle Tax: What You Need to Know

A side hustle is like your secret financial weapon – a little extra business that brings in some extra income. From selling second-hand clothes on online platforms to doing freelance work on sites like Fiverr or Etsy, the possibilities are endless. But did you know that you need to pay tax on the money you make from these activities if you’re making a profit over £1000? That’s right, the tax authorities want a slice of your hustle pie!

Don’t worry; maintaining detailed records of your income and expenses can streamline this process. This will assist you in determining your tax liability and ensuring compliance with tax regulations. After all, you wouldn’t want to get on the wrong side of the taxman, would you?

The Threshold for Taxation on Side Income

Are you aware you can earn up to £1,000 in the UK tax-free from your side hustle? This measure is in place to tackle tax evasion and makes it easier for people to start side hustles without worrying about taxes. If you have property income and trading, you can use £1,000 for each business type.

However, if you make more than the tax-free earnings of £1,000 from your side hustle, you’ll have to pay tax on the earnings. Side hustlers can only use the trading allowance of £1000 or claim expenses against their tax bill. Considering the best option for your specific situation is crucial. You can’t use both. So, don’t forget to factor this in when you’re counting your side hustle earnings!

Registering for Tax as a Side Hustler

Now that you’re generating significant income from your side hustle, how should you proceed with tax registration? Here are the steps you need to follow:

1. Decide whether you want to operate as a sole trader or a limited company. Each has its own set of tax implications. Most are self-employed and register for the self-assessment tax return.
2. Familiarise yourself with the tax registration guidelines set by HMRC.
3. Adhere to the guidelines correctly to ensure proper tax registration.

The tax registration process for a side hustler is relatively straightforward. Here are the steps to follow:

1. Sign up as self-employed on the self-assessment website and submit your details; see further details below.
2. Wait for the activation codes to arrive in the mail.
3. Remember, you must register for tax by 5th October in the next tax year after starting your side hustle.
4. HMRC will keep sending you tax returns every year unless you tell them to stop, so keep track of your tax obligations!
5. When you complete a self-assessment tax return, you will know how much tax to pay and the dates of when to pay tax.

Choosing Your Business Structure

Selecting the appropriate business structure for your side hustle is a crucial step. You can opt for a sole trader, partnership, or limited company. Each setup has its own tax implications, and the right choice depends on your circumstances.

Let’s say you decide to run your side hustle as a sole trader. In this case, you’ll only have to worry about paying tax on the profits. But if you decide to run it as a limited company, the profits will be subject to corporation taxes, although there are advantages for dividends. So, you’ll need to weigh the pros and cons of each setup before making a decision.

Completing Your Self-Assessment Tax Return

Fulfilling your self-assessment tax return is vital to your tax responsibilities as a side hustler. This process involves letting the HMRC know about your income and expenses, and it’s essential to get it right to avoid penalties.

To complete your self-assessment tax return, you’ll need to follow these steps:

1. Sign up as self-employed with HMRC. You must do this by 5th October following the tax year you started. For example, if you started trading in the 22/23 tax year, you must register as self-employed by 5th October 2023.
2. Gather all your financial documents like bank statements, pension contributions, interest received, invoices, and receipts for your expenses.
3. Ensure you have your Unique Taxpayer Reference (UTR) and National Insurance number, and if you have a regular job, your employer references number, P60 and P11D.

Remember, submitting your self-assessment tax return by midnight on 31st January after the end of the tax year you’re reporting for is crucial. You will also need to pay the tax that you owe by 31st January, and if there are large profits, you will have to pay an advance payment for the following tax year.

HMRC gives several options for paying taxes, direct debit, debit or credit card, online banking, phone HMRC, or setting up a payment plan. Don’t be late; the taxman waits for no one!

Calculating Your Side Hustle Tax Obligation

Determining the amount of tax you owe for your side hustle can be likened to solving a puzzle. But don’t worry, we’ve got you covered. To calculate your tax obligation, consider your allowable expenses and all your income sources.

Allowable expenses for your side hustle can include:

• Office Supplies
• Use of home office
• Travel
• Phone bills
• Other running costs

By subtracting these expenses from your total income according to the actual tax rules, you will only be paying tax on what you’re making, which is a great way to reduce your tax bill.

How much tax you pay will depend on your personal allowance, the profits and any other income you receive, like employment income. To calculate your income tax bill, use our self-employed tax calculator.

Understanding Allowable Expenses

Let’s explore allowable expenses further. These are expenses related to your business that you can deduct from your income when calculating your taxable profit. Essentially, these are your business costs that are necessary and directly related to your side hustle.

So what counts as allowable expenses? Well, if you’re running your side hustle from home, you might be able to write off some of your bills, including:

• Heating, electricity, and water bills
• Council Tax
• mortgage interest or rent
• broadband and phone usage

You can use a flat-rate simplified expenses method to calculate these deductions, making your tax calculation process easier. Remember, if you use something for work and personal stuff, you can only claim the business part of the expense.

Read our comprehensive guide on claiming business expenses to determine what you can claim.

Navigating Multiple Income Streams

Tax calculation can be slightly more intricate for those juggling multiple income streams. You need to include all your income when calculating your taxes, and after taking out any allowances or reliefs, HMRC will tax whatever’s left.

In the case of different income sources like dividends or rent, these could have their tax rates separate from income tax. For example, dividends are taxed at a lower 8.75% rate. So, when filling out your tax forms, make sure to report the different types of taxable income correctly to avoid any unnecessary complications.

The Digital Age: Online Sellers and Tax Rules

In the digital era, online platforms must report user income to tax authorities.

This new rule is designed to ensure accurate taxation for online sellers, taking into account their respective income tax band. So, if you’re selling items or offering services online, this rule applies to you.

From 1 January 2024, online platforms must track how much money people make and pass this information on to HMRC. Then, the taxman will look into it and chase up any unpaid taxes if needed.

This initiative will not affect you if you already pay income tax on earnings from your side hustle. You will not experience any impact from this initiative if you pay tax on your earnings. But staying informed about these changes is always good to ensure you comply with the tax rules.

Preventing Side Hustle Tax Evasion: Your Responsibilities

As a side hustler, it’s your responsibility to prevent tax evasion by reporting your income and expenses accurately to tax authorities. This might seem daunting, but with the right knowledge and preparation, you can navigate your tax obligations like a pro.

Common mistakes to avoid include:

• Not getting professional help when needed
• Not keeping accurate records
• Ignoring cash flow
• Not budgeting for the tax bill
• Dealing with cash transactions

So, stay organised, keep good track of your money, stay updated on tax laws, and follow the rules. After all, the consequences of avoiding tax can be severe, with penalties.

National Insurance: How It Relates to Your Side Hustle

National Insurance represents another significant facet of taxation for side hustlers. It’s a system in the UK that provides certain state benefits. But how does it relate to your side hustle?

If you are a side hustler, you may need to pay National Insurance if your earnings are considered trading income. If you’re making £12,570 or more yearly, you must pay Class 2 and Class 4 NI rates. However, if your profits are below £6,725, you won’t need to worry about Class 2. From April 2024, class 4 NI is abolished.

Different business structures, like sole traders and limited companies, have their own National Insurance contributions and rates, so consider this when choosing your business structure.

Side Hustle Tax Benefits and Relief

Now, let’s focus on the positives – tax benefits and relief. Yes, they do exist! You can take advantage of several tax breaks and allowances as a side hustler.

For instance, the £1,000 trading allowance allows you to sell up to £1,000 yearly from your side hustle without paying taxes. Also, you can claim all allowable expenses related to your side hustle activities, decreasing your taxable profit and potentially lowering your tax bill. So, please keep track of these benefits and maximise them!

Consequences of Non-Compliance of Paying Tax

So, what are the consequences of non-compliance with tax regulations? Well, let’s say it’s not a pretty picture. If you forget to file your tax return for your side hustle income, you might get hit with a fine of £100 or a daily fine of £10 for up to 90 days if it’s three months late, or a penalty of the higher of £300 or 5% of the tax due if it’s even later.

Failing to comply with tax regulations can also result in interest charges from HMRC. In the worst-case scenario, the consequences of avoid paying tax in the UK can include:

• Fines
• Interest charges
• Legal action
• Imprisonment of up to 14 years

The maximum penalty for tax evasion in the UK can be as high as 200% of the tax owed. Therefore, it’s crucial to stay on top of your tax obligations and ensure you comply with all relevant tax laws.

Tools and Resources for Side Hustlers

Specific tools and resources can simplify the calculation of your taxable income from your side hustle finances. These include accounting software and financial templates that can help you keep track of your income and expenses.

Some recommended accounting software for side hustlers include QuickBooks Online, Xero, and FreeAgent. These platforms offer features ideal for small businesses and can save up to 8 hours a month. Many accounting software programs have tools enabling you to upload transactions, saving time.

Using Excel spreadsheets is another option. We offer a free cash book template to enter all your transactions for the year and will produce a profit and loss account to calculate your self-employed taxable income.

It is also worth having a separate business bank account; this will help ensure you keep the business and private transactions separate and claim for all expenses.

Summary

In conclusion, understanding your side hustle tax is essential to running your side hustle effectively and legally. There’s much to consider, from registering for tax and choosing the right business structure to understand allowable expenses and navigating multiple income streams.

With the right knowledge and tools, you can confidently navigate the world of side hustle taxation. So, why wait? Start your side hustle journey today and make your hard work pay off in the best possible way!

Frequently Asked Questions

Do I need to pay tax on a side hustle?

If you have a side hustle, you may need to pay tax on your earnings, especially if you sell items online or rent out space. Platforms like eBay and Airbnb will report your income to the tax authorities, so you must know your tax obligations.

What are the new side hustle rules for HMRC?

The new rules require digital platform operators to collect and verify information about ‘side hustle’ earners who use their online marketplaces, and anyone earning over £1,000 a year through their trading must pay income tax on these earnings.

Can you earn 1000 tax-free?

Yes, if your self-employed income is £1,000 or less, you do not need to tell HMRC or file a tax return, making it tax-free. So, you can earn £1,000 tax-free if you are self-employed.

How do I register for side hussle tax?

You can register for tax as a side hustler by operating as a sole trader or a limited company and signing up as self-employed on the self-assessment website. It’s a straightforward process that can be done online.