In recent years, a growing number of people have turned to side hustles as a way of pursuing a hobby or skill or bringing in some extra money to supplement their existing income.
But while a side hustle can be a great way to build a safety net for those unexpected expenses, many are unaware of the tax obligations of earning money outside of their main income source and, more importantly, the potential legal implications of not paying side hustle tax.
This article will explore side hustle tax in more detail, including whether you need to pay side hustle tax, how to register a side hustle as a business, and how to keep on top of your finances while trading goods or services online.
What is classed as a side hustle?
It can be difficult to differentiate between what’s classed as a job and what’s classed as a side hustle. Put simply, a side hustle is something you do to earn some extra income on top of your main income source.
Examples of side hustles include:
- Buying items at a discount to resell for a profit (buying goods at car boot sales to sell on online marketplaces)
- Making items with the intention of selling them (e.g. selling homemade greeting cards at market stalls)
- Freelance work (e.g. providing writing, photography or graphic design work for a fee)
But at which point does this go from a fun way to make some money on the side to a second, taxable job? And where does HM Revenue & Customs (HMRC) draw the line? Thankfully, there is a set amount you need to earn before a hobby becomes a side hustle.
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When was a side hustle tax introduced?
In 2024, it was widely reported that a new side hustle tax had come into force and everyone selling goods or services online would have to start paying tax on anything they sold. However, HMRC confirmed that it’s not a new tax that has been introduced, but simply new tax rules.
Under these new rules, digital platforms like eBay, Vinted, Depop, and Airbnb are now required to collect and report various details about certain seller’s transactions and income directly to HMRC.
This means that, if you sell goods or services on these kinds of platforms, HMRC might be able to see your transactions and how much you’ve made from them. This information will also be available to you and can be used to determine whether you owe any income tax on any of the profits of your sales.
However, these rules only apply to users who sell more than 30 items a year or earn more than 2,000 euros (approximately £1,735) a year. So if you only use digital platforms to occasionally sell old items you no longer want or need as opposed to trading as a way of making income, these new rules should have no impact on you or your tax obligations.
Do I have to pay side hustle tax?
Generally, you’ll have to pay tax on a side hustle if it makes you more than £1,000 in a single tax year. This means that, as long as your gross income for the year falls under £1,000, HMRC will class it as ‘casual or miscellaneous’ and you won’t have to pay tax on it.
Even if you earn an income from two side hustles but it’s less than £500 each, this amount will still be tax-free because your total earnings are less than £1,000.
To pay side hustle tax, you’ll need to fill out a form known as a ‘self-assessment tax return’ online or by downloading a paper copy from the GOV.UK website. It’s important to note that there are different deadlines depending on how you file.
Remember, the £1,000 trading allowance is for your annual income, not the profit made. This means that you’ll need to declare any amount earned over £1,000 to HMRC, even if you’ve made a loss.
Side Hustle Tax Calculator
Tax brackets for 2023/24 tax year:
How do I register as a side hustle?
If you want to register a side hustle as a business, there are certain steps you’ll need to follow. We’ve outlined the process below:
Decide your business
The first step is to decide between registering as a sole trader or a limited company. There are various advantages and advantages to both, depending on the type of business you want to launch.
Inform HMRC you’re self-employed
Next, you’ll need to let HMRC know that you’re self-employed and will be earning an income from trading goods or services. This can be done on the GOV.UK website.
Register for self-assessment
Once you’ve contacted HMRC, you’ll need to register for self-assessment. This will then be used by HMRC to calculate your tax liabilities for the year. Within 10 days, you’ll be sent a Unique Taxpayer Reference (UTR) in the post, which you’ll need to submit your tax return.
Set up a government gateway account
Finally, you need to set up a government gateway account with your UTR number. This will allow you to submit your tax returns online going forward.
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What tax return deadlines do I need to know about?
HMRC must receive your tax return and any tax owed by certain deadlines each year. The tax year always commences and ends on the same date, running from April 6 to April 5 the following year.
We’ve provided an outline of all the deadlines you need to know about below:
To complete a tax return for the first time – October 5
If you’re completing a tax return for the first time, you’ll need to inform HMRC by registering for a self-assessment by October 5. Failure to do so can result in you being fined.
To submit a paper tax return – October 31
If you’re submitting a paper tax return, it must be sent by post before midnight on October 30. There are penalties for submitting your paper tax return after this date.
To submit an online tax return – January 31
If you’re submitting a tax return online, you must submit it before midnight on January 31. By completing the process online, you’ll have an extra three months.
To pay taxes you owe – January 31
If you owe taxes, these will need to be paid to HMRC by the end of January 31. Failure to stick to this deadline will mean interest is added to your total balance.
What happens if you don’t pay tax on a side hustle?
Not paying tax on a side hustle when you know you should is classed as tax evasion, which is not only a type of fraud but a criminal offence. There can be serious penalties for tax evasion, including prison.
HMRC have extensive legal powers to ensure they recover money owed to them. In most cases, they’ll use debt collection agencies and enforcement agents to ensure they get paid.
Late tax payments also accrue interest over time, meaning you’ll end up owing much more than you did if you were just paid what you owed in the first place.
Can you claim back tax on a side hustle?
Running a side hustle often requires additional costs. For example, if you run a bakery business, your running costs will likely include ingredients, equipment, marketing, and fuel.
However, you might be able to reduce your tax bill by claiming allowable expenses from your taxable income. HMRC has a detailed list of the kinds of things you’re allowed to claim back which, depending on the type of job, can include office supplies, staff expenses, and travel and transport.
In order to claim tax relief on a side hustle, it must be classed as trading. For this to happen, you must be able to prove you are buying in order to resell.
Knowing which expenses you can claim – and how much – is crucial to completing your tax return correctly. For example, claiming for the wrong expenses could get you in trouble with HMRC while failing to claim for allowable expenses you’re entitled to can lead to you paying more tax than you need to.
How can I keep on top of my side hustle’s finances?
If you have a side hustle that you intend to earn an income from, keeping on top of your finances is key to being prepared for the end of the tax year when your tax return is due.
Consider getting a business bank account
Firstly, getting a business bank account can help you keep your side hustle’s finances separate from your personal or employment income. This can make it easier to source bank statements and check your income and outgoings at a glance.
Track all your income and expenses
Don’t forget to record every pound you earn and spend from your side hustle. From marketing materials to travel costs, having a written note of everything coming in and out can be useful when you come to complete your tax return or if a problem arises down the line.
Set a budget
Budgeting is one of the most powerful financial tools you can use as a self-employed person. It can help you manage the various expenses expected of you and, more importantly, ensure you’re not overspending in a particular area.
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Conclusion
In the UK, a side hustle has become a popular way to pursue a skill or hobby while making money doing so. But with some people making thousands of pounds a year from selling goods or services, it’s important to familiarise yourself with side hustle income and tax.
Generally, if you earn more than £1,000 in a single tax year from a side hustle, you’ll need to pay tax on it. This can be done by filling in a self-assessment tax return and submitting it by a specific deadline.
Taxes can be daunting – especially if you’ve never had to complete a tax return or even deal with HMRC before. However, the GOV.UK website has several online guides designed to explain the tax system and break the tax return process into easy-to-understand steps. Alternatively, TaxAid can assist with a tax-related problem if HMRC can’t solve the problem.
