Tax treatment depends on your individual circumstances and may be subject to future change.
Millions of people in the UK have undertaken side hustles to boost their finances as the cost of living crisis makes it harder to get by on just one income. We take a look at how much risk you are in of running afoul of the taxman when making a little money on the side.
Figures from insurance provider Aviva suggest one in five adults in the UK have taken on a side project since March 2020, with one in six earning upwards of £1,000 a month from that second income.
A side hustle can be anything from selling second-hand clothes online to taking on an extra job or even starting a new business.
But these seemingly innocent income drivers could push you into a higher tax bracket, or leave you subject to a side-hustle tax.
In some cases, you may also need to file a self-assessment return to HM Revenue & Customs (HMRC) to avoid a penalty charge.
Here’s what you need to think of?
Read more: ‘Can I gift more than £3,000 without paying inheritance tax?’
What is the trading allowance?
All workers in the UK pay national insurance and income tax. However, not all money made through a side hustle is considered taxable income.
That’s because you have a trading allowance of £1,000 a year in addition to the personal allowance of £12,570. To put it simply, most people selling odd bits and bobs won’t exceed this limit and anyone under it is safe.
1. Selling secondhand items online
Jobs that probably won’t generate tax bills include, say, money made at car boot sales and online marketplaces. These transactions are unlikely to produce a big income, and therefore won’t push you over the £1,000 annual tax-free trading allowance.
Tax-free allowance: £1,000 or £12,570 if you don’t have a main job.
Tax payable on: Earnings over £1,000, providing you are above the personal allowance. The tax rate is subject to your income tax band.
Want to work out your take-home pay? Use our free income tax calculator
2. Starting an online business
If you regularly buy and sell stock online, and are earning more than £1,000 through your side hustle, HMRC considers you a trader. In other words, your side hustle is a business.
You will need to register that business as a company – the deadline for this is 5 October after the end of the tax year in which you started the company.
If you make over £1,000 a year in revenue, you’ll need to declare this – along with your profits – to HMRC in January through self-assessment. If you’re registered as a sole trader or a business, and you declare your costs and show your profits, only your profits will be liable for the 20% tax.
Registering yourself as a business has tax benefits. You get relief on “allowable expenses”’ – money you spend that has gone back into the business.
So, for example, if you earned £1,100 but spent £100 or more on allowable expenses for the business, such as goods you bought purely for re-sale, you may not have to pay any tax.
Since September 2016, HMRC has had access to sites such as PayPal and can request extensive information from them. This came as 870,000 people in the UK, including online sellers, failed to do a self-assessment return in 2016 – so the taxman is keeping an eye on this market.
You will need to declare any revenue over £1,000 and profits in a self-assessment tax return by 31 January each year.
Tax-free allowance: £1,000
Tax payable: Earnings over £1,000, minus any allowable expenses and calculated based on your overall income tax band.
Read more: How to check your tax code and what it means
3. Renting out your driveway
Making money from our empty spaces has become more popular in recent years. But this too could come with tax complications.
HMRC takes a cut of any rental income that you earn from renting out parking spaces on your drive – once any earnings you make exceed £1,000 per tax year.
Again, though, you get “allowable expenses” – for example, tax relief on any accountancy, legal or insurance costs you have incurred in relation to that let. You will need receipts to prove these.
The tax you will pay will be on your income above £1,000, minus any allowance expenses.All of this must be filed in your self-assessment tax return.
Tax-free allowance: £1,000
Tax payable: Earnings over £1,000 minus allowable expenses, charged based on your tax band.
4. Renting out a spare room
If you rent out a furnished room in your home to a lodger through the government’s Rent a Room scheme – which can also apply to Airbnb landlords – the first £7,500 of rent each year is tax-free.
However, this is halved to £3,750 if you share the income with your partner or someone else.
The tax exemption is automatic if you earn less than the threshold, meaning you don’t need to do anything.
If you earn more than this, you must complete a self-assessment tax return to let HMRC know. The amount you pay in tax will depend on how far over your allowance you are. Your income will be grouped with your salary to work out your tax band.
Tax-free allowance: £7,500
Tax payable: Earnings over £7,500, calculated on your income tax band.
5. A second or part-time job
If you have a second job, such as a part time job in a restaurant and you get paid through PAYE, you won’t have to declare it to HMRC.
The tax authority will automatically combine your income and then adjust your tax code accordingly.
Tax-free allowance: No tax free allowance as you are likely to have already exceeded the personal allowance through your main job.
Tax payable: Any extra income will be calculated based on the income tax band you fall under.
A word of warning on taxes
Once HMRC is notified of your extra income, whether that be through PAYE or self-assessment, it will look at how much tax you have to pay for that tax year.
Income tax is levied on profits or income from 6 April to 5 April each year. This is based on combined income from both your main job and self-employment. You’ll also have to pay national insurance contributions.
If your side job counts as self-employment, the amount you are taxed on will vary based on any allowable expenses you have claimed for. HMRC has a second job tax calculator to help you work out what you will have to pay on your side hustle.
Unfortunately, though, there is a risk that your second source of earnings could push you into a higher-rate tax bracket, meaning you pay more tax in that year.
If you don’t have another income and you sell items as a hobby business, you won’t pay income tax on profits less than £12,570 (you personal allowance).
Below is an example of how much you might pay for the current tax year:
- Income from employment: £40,000
- Profits from side hustle: £14,000
- Personal allowance (tax free): £12,570
- Tax on income from employment: £8,775.80
- Tax on business profits: £2600
Read more: How are shares taxed?
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As an enthusiast and expert in tax matters, I can attest to the complexity and importance of understanding the tax implications of various income streams, especially in the context of side hustles. It's crucial to navigate the intricate tax landscape to avoid legal issues and ensure financial compliance. Now, let's delve into the concepts discussed in the article:
- The article mentions a trading allowance of £1,000 a year in addition to the personal allowance of £12,570 for all workers in the UK. This means that not all money earned through a side hustle is considered taxable income, as the first £1,000 is tax-free.
Selling Secondhand Items Online:
- Income generated from selling secondhand items online, such as at car boot sales and online marketplaces, is likely not to exceed the £1,000 annual tax-free trading allowance. Tax is payable on earnings over £1,000, subject to your income tax band.
Starting an Online Business:
- If you earn more than £1,000 through your side hustle, HMRC considers you a trader, and you need to register your business. Registering has tax benefits, including relief on allowable expenses. Profits from the business, minus allowable expenses, are subject to a 20% tax.
Renting Out Your Driveway:
- Income earned from renting out parking spaces on your driveway is taxable once it exceeds £1,000 per tax year. Allowable expenses, such as accountancy, legal, or insurance costs, can be deducted. Tax is payable on earnings above £1,000 based on your tax band.
Renting Out a Spare Room:
- If you rent out a furnished room under the Rent a Room scheme, the first £7,500 of rent is tax-free. This exemption is halved if you share the income. Tax is payable on earnings over £7,500, calculated based on your income tax band.
Second or Part-Time Job:
- If you have a second job paid through PAYE, you won't have to declare it to HMRC, as they automatically adjust your tax code. However, any extra income will be calculated based on your income tax band.
- HMRC will assess your tax liability once notified of extra income. Income tax is based on combined income from both your main job and self-employment. National insurance contributions are also applicable. The risk of moving into a higher tax bracket exists if your side hustle income is significant.
- An example calculation is provided in the article, illustrating how income from employment and profits from a side hustle are taxed based on personal allowances and income tax bands.
Understanding these concepts is essential for anyone engaging in a side hustle to ensure compliance with tax regulations and optimize their financial position. Always consider seeking professional advice for your specific circumstances, as tax laws can be subject to change.