Side Hustles and Your Tax Obligations

OUR GUIDE ON your tax OBLIGATIONS as a side hustler

If you're starting or already engaged in a side hustle, it's crucial to understand your tax responsibilities. As someone who works as a Chartered Accountant, I've had the opportunity to assist clients involved in side hustles. I can't emphasise enough how important it is to grasp your tax obligations right from the start.

In this article, I'll cover aspects related to taxes for side hustles in the UK. This will include insights on estimating and setting aside money for your taxes. Depending on your earnings from the side hustle, you might be required to register with HMRC and complete a self-assessment tax return. Additionally, I'll provide guidance on the significance of having a business bank account. Help you understand the pros and cons of operating as either a sole trader or forming a limited company.

By the time you finish reading this article, you'll have learned about your tax obligations as a UK-based side hustler. You'll feel confident in ensuring that you're meeting your tax responsibilities appropriately.

table of contents

• Understanding side hustle taxation in the UK
• The £1,000 tax-free trading allowance
• Tax deductions and allowable expenses
• Registering with HMRC
• Paying tax on side hustle via self-assessment tax return
• Estimating and saving for your tax
• The importance of a dedicated business bank account
• Choosing between being a sole-trader and a limited company
• FAQs on side hustle tax in the UK
• Final thoughts

It's essential to understand how taxation works in the UK. Here are some key points to keep in mind:

The £1,000 tax-free allowance

If your side hustle earns you less than £1,000 per tax year, this is your sales revenue; you won't need to pay any tax on it. However, if you earn more than this amount, you must report it to HMRC and potentially pay tax on the income.

Income tax

If your side hustle income exceeds the £1,000 tax-free allowance, the amount of income tax you'll need to pay depends on your total income for the year, including your side hustle income.

National Insurance contributions

Depending on the nature of your side hustle, you may also need to pay National Insurance contributions on your income. For example, if you're self-employed and your profits exceed a certain amount, you'll need to pay Class 2 and Class 4 National Insurance contributions. For the current 2023/24 tax year, the

Lower Profits Limit is £12,570. If your self-employed profits for the 2023/24 tax year are less than £12,570, then you do not need to pay any Class 2 NIC or Class 4 NIC.

Record keeping

Keeping accurate records of your side hustle income and expenses is essential. This will make it easier to complete your tax return and ensure you're paying the correct amount of tax. Remember, you must keep your records for at least 5 years after the 31 January submission deadline of the relevant tax year.

Deadlines

You'll need to complete a self-assessment tax return each year if you earn more than £1,000 from your side hustle. The deadline for submitting your tax return and paying any tax owed is usually the 31st of January, following the end of the tax year.

It's worth noting that the rules around taxation can be complex, and it's always a good idea to seek professional advice from a Chartered Accountant if you need clarification on your tax obligations.

If you're a new side hustler, the good news is that everyone in the UK has a tax-free trading allowance of £1,000. This means that if you earn (generate sales) less than £1,000 from your side hustle, you don't need to declare the income to HMRC.

The trading allowance is a tax relief that applies to individuals who earn income from self-employment or casual work. It is designed to help those who make small amounts of money from their side hustle and is particularly beneficial for those who only work part-time or irregularly.

It's important to note that the trading allowance is separate from your personal allowance, which is the amount of income you can earn before you start paying income tax. For the 2023/24 tax year, the personal allowance is set at £12,570. This means you can make up to £13,570 (the personal allowance plus the trading allowance) before paying income tax.

If your side hustle income exceeds £1,000, you must declare it on your tax return. You will then be taxed on the amount you earn above the trading allowance minus any allowable expenses. The amount of tax you pay will depend on your overall income tax band.

It's worth noting that the trading allowance is available to everyone, regardless of whether they are self-employed. This means that if you earn money from selling goods or services, you can still benefit from the trading allowance even if you have a full-time job.

Key Takeaway

The tax-free trading allowance of £1,000 is an excellent benefit for side hustlers in the UK. It allows you to earn extra income without worrying about additional tax obligations if you earn less than £1,000. If you make more than this amount, you must declare it on your tax return and pay tax on the amount you earn above the trading allowance.

When you're running a side hustle, it's essential to keep track of all your expenses to claim back as much tax as possible. There are many tax deductions and allowable expenses that you can claim, which can help reduce your tax bill and increase your profits.

Some of the most common tax deductions and allowable expenses for side hustles in the UK include:

Office expenses

If you work from home, you can claim back a portion of your household bills, such as rent, mortgage interest, council tax, utilities, and any office equipment you purchase, such as a computer or printer.

Travel expenses

If you need to travel for your side hustle, you can claim back the cost of your travel, such as train or bus fares and business mileage.

Marketing expenses

If you advertise your side hustle, you can claim back the cost of your advertising, such as flyers, posters, and online ads.

Professional fees

If you need to hire a professional, such as a Chartered Accountant, you can claim back their fees as an allowable expense.

Training and development

If you need to undertake update training or development for your side hustle, such as attending a course or conference, you can claim back the cost as an allowable expense.

wholly and exclusively Rule

It's important to note that you can only claim back expenses that are wholly and exclusively for your side hustle. You cannot claim back personal expenses, such as food or clothing, even if you use them for your side hustle.

How to Claim back expenses

To claim back tax deductions and allowable expenses, you must keep accurate records of all your expenses and submit them as part of your self-assessment tax return. You can claim back expenses for up to four years after the end of the tax year they relate to, so keeping all your records is essential.

Key Takeaway

In summary, by keeping track of your expenses and claiming back tax deductions and allowable expenses, you can help reduce your tax bill and increase your profits from your side hustle. Just remember to keep accurate records and only claim back expenses that are wholly and exclusively for your side hustle.

To legally operate a side hustle in the UK with income above £1,000, you must register with HM Revenue & Customs (HMRC). Here's what you need to know:

How to Register with HMRC

The process for registering with HMRC depends on your specific situation. If you're already self-employed and have a UTR (Unique Taxpayer Reference) number, you can simply add your side hustle to your existing self-assessment tax return.

However, if you're new to self-employment, you must register with HMRC and obtain a UTR number. You can do this online through the HMRC website at www.hmrc.gov.uk or by calling the HMRC Self-Employment Helpline on 0300 200 3310.

Once you've registered, HMRC will send you a letter with your UTR number, which you'll need to keep safe as you'll need it to file your tax returns.

Deadlines for Registering

If you're starting a new side hustle, you need to register with HMRC by 5 October in your business's second tax year. For example, if you started your side hustle in June 2023, you must register with HMRC by 5 October 2024.

If you're already self-employed, you need to add your side hustle to your existing self-assessment tax return by the deadline of 31 January following the end of the tax year. For example, if your side hustle started in June 2023, you must include it on your self-assessment tax return for the tax year ending 5 April 2024, due by 31 January 2025.

Penalties for Late Registration

You must register with HMRC by the deadline to avoid being subject to penalties and fines. The penalties can vary depending on how late you are in registering and can range from a percentage of the tax owed to a fixed amount per day.

Therefore, registering with HMRC as soon as possible is essential to avoid any unnecessary penalties or fines.

Key Takeaway

By understanding the process and deadlines for registration, you can ensure that you comply with the law and avoid any potential penalties or fines.

As a side hustler earning more than £1,000 in a tax year, you must complete a self-assessment tax return for this income source. This means you must register for self-assessment with HM Revenue and Customs (HMRC) and file a tax return annually.

You can either complete your tax return online or by mail. The deadline for filing your tax return online is the 31st of January, following the end of the tax year, while the deadline for filing by post is the 31st of October, following the end of the tax year.

How to complete a self-assessment tax return

When filing your self-assessment tax return, you must provide details of your side hustle income, including any expenses you incurred while earning that income. You can claim tax deductions for expenses that are wholly and exclusively for the purposes of your side hustle. Examples of allowable expenses include equipment, supplies, and travel expenses.

Keeping accurate records of your income and expenses throughout the tax year is essential. This will make it easier to complete your tax return accurately and claim all the tax deductions you're entitled to. You should also keep receipts and invoices as evidence of your expenses, as HMRC may ask to see them as part of a tax audit.

If you need help filling out your self-assessment tax return, you can seek help from a Chartered Accountant. They can guide you through the process and ensure you claim all the tax deductions you're entitled to.

Key Takeaway

In summary, paying tax on your side hustle via a self-assessment tax return is a legal requirement if you earn more than £1,000 in a tax year. It may seem daunting, but it can be made easier by keeping accurate records of your income and expenses and seeking help from a Chartered Accountant if needed.

Estimating how much tax you'll owe and saving accordingly is essential. The amount of tax you'll need to pay on your side hustle is calculated by HMRC using your self-assessment tax return. You'll need to include details of your employment and other income sources on your self-assessment tax return, so HMRC can see how much tax you've already paid.

estimate how much tax you'll owe

You must know your total income from your side hustle to estimate how much tax you'll owe. This includes any money you've earned from selling products or services and any tips or commissions you've received. You'll also need to deduct any expenses you've incurred while running your side hustle, such as the cost of materials, equipment, or marketing.

Once you estimate your taxable income, you can use HMRC's tax calculator or consult with a Chartered Accountant to determine how much tax you'll owe. It's important to note that the tax rate you'll pay on your side hustle income will depend on your total income for the year, including any income you earn from your primary job.

Set aside a portion of your income

To save for your tax bill, setting aside a portion of your side hustle income each month is a good idea.

As a rough rule of thumb, if you expect to earn up to £50,000 a year from your side hustle and other earnings, putting away 25% of your monthly income is a good idea.

Again, a Chartered Accountant will be able to assist you with this, and advise you of a percentage to save.

You can open a separate bank account specifically for your side hustle income and use it to save for your tax bill.

You can use accounting software, such as Xero or QuickBooks, to track your income and expenses and set aside money for your tax bill each month.

Key Takeaway

Estimating and saving for your tax bill is essential to running a side hustle in the UK. By keeping track of your income and expenses and setting aside money each month, you can avoid any surprises come tax season and ensure you meet your tax obligations.

✅ Check out our in-depth guide on how much you should save for tax, including using our simple TAP (tax allocation percentage) method for managing your taxes. 

One of the most essential pieces of advice I give my clients is that keeping your personal and business finances separate is crucial. One of the best ways to do this is by opening a dedicated business bank account.

Having a separate account for your side hustle can make managing your finances easier, keeping track of your earnings and expenses, and filing your taxes correctly. It can also help you avoid potential legal issues from mixing personal and business finances.

When opening a business bank account, choosing a bank that offers the features and services you need is essential. Look for a bank that offers low fees, a user-friendly online platform, and good customer service. Consider a bank that offers additional perks, such as cashback or rewards points.

Another benefit of having a dedicated business bank account is that it can make it easier to apply for loans or credit in the future. Lenders will often look at your business bank account to determine your creditworthiness, so having a separate account can help you build a strong credit history for your side hustle.

Opening a dedicated business bank account is a smart move for anyone running a side hustle in the UK. It can help you keep your finances organised, protect you legally, and set you up for financial success.

When starting a side hustle, you must first decide whether to operate as a sole-trader or a limited company. Both options have their advantages and disadvantages, and the best choice for you will depend on your specific circumstances.

Sole-Trader

As a sole-trader, you will be self-employed and have complete control over your business. You will be responsible for all aspects of your business, including finances, marketing, and operations.

advantage of being a sole-trader

One of the main advantages of operating as a sole-trader is that it is a relatively simple and cost-effective way to start a business. You will not need to register with Companies House or file annual accounts, which can save you time and money.

DISADVANTAGES OF BEING A sole-trader

However, there are also some disadvantages to operating as a sole-trader. You will be personally liable for any debts or legal issues that arise from your business, which could put your personal assets at risk. Additionally, you may find it harder to secure funding or attract clients as a sole-trader, as some people may prefer to work with a limited company.

Limited Company

Operating as a limited company means that your business will be a separate legal entity from yourself. This means you will have limited liability for any debts or legal issues arising from your business, as the company will be responsible for these instead.

ADVANTAGE OF BEING A limited company

One of the main advantages of operating as a limited company is that it can provide more credibility and professionalism to your business. Larger clients may be more likely to work with a limited company, as it can give them more confidence in your ability to deliver quality work.

disadvantages OF BEING A LIMITED COMPANY

However, there are also some disadvantages to operating as a limited company. Setting up and running a limited company can be more complex and expensive, as you must register with Companies House, file annual accounts, and comply with various legal and financial obligations. Additionally, you may have less control over your business, as you must comply with company laws and regulations.

Key Takeaway

The choice between operating as a sole-trader or a limited company will depend on your specific circumstances and goals. It is essential to carefully consider the advantages and disadvantages of each option before making a decision. A Chartered Accountant or business advisor can advise on the most appropriate choice based on your specific circumstances.

When starting a side hustle, the excitement of generating additional income can sometimes overshadow the equally crucial aspect of tax obligations.

Like any other income source, earnings from side hustles are subject to tax regulations in the UK.

Being informed and proactive about your tax responsibilities ensures you stay on the right side of the law and lets you sleep easier at night.

Remember, while side hustles offer a unique blend of flexibility and financial gain, they come with the fundamental responsibility of tax compliance. Partner with a knowledgeable Chartered Accountant, stay updated with HMRC guidelines and approach your entrepreneurial journey confidently and clearly.