Whether you’re working towards self-employment or just want to earn extra income, a side hustle can be a great opportunity. However, before becoming a multi-billionaire with your new venture, you must consider the side hustle tax. Depending on how much you earn, UK side hustlers have certain tax obligations.

Jason Loewenthal, banking expert at Finder UK, outlines what you need to know if you’re hoping to turn your side gig into a serious money maker.

Taxable side hustles

Earnings of less than £1,000 in one tax year are not considered as taxable income, and you won’t have to register as self-employed or declare the additional income to HMRC.

Everyone in the UK has a tax-free trading allowance of £1,000 in additional income, meaning if you’re employed full-time by a company and earning less than £1,000 from your side hustle, you won’t have any tax obligations. However, if you’re earning more than £1,000 from your side hustle in a tax year, you may have to pay taxes.

Employees usually pay taxes on income through PAYE. The PAYE system, short for ‘Pay As You Earn’, is a system used by HMRC to collect income taxes and National Insurance contributions. Running a side hustle is different, as you won’t have a tax code and your tax won’t be automatically calculated.

You’ll have to register as self-employed via HMRC and submit a self-assessment tax return to pay any tax due on your side hustle.

What counts as a side hustle?

In layman’s terms, a side hustle is money that you earn on top of your main source of income. Some popular side hustles include selling old clothes or completing online surveys.

Selling the odd T-shirt or two won’t be taxable, but if you create a Vinted clothes empire that earns more than £1,000 a year, you have crossed the trading allowance and will need to register with HMRC.

According to Finder research, 2 in 5 Brits have a side hustle, with an average monthly income of £914. While some people use a personal bank account to manage their side hustle’s finances, it can be easier to separate your finances and open a business bank account. It’s worth looking at a guide to instant business bank accounts to see the fastest and easiest way to open a business account for your side hustle.

Side hustle tax deductions

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 information on your full-time employment on your self-assessment tax return so HMRC can see how much tax and national insurance you’ve already paid. blog

It’s worth being aware that, depending on how much your side hustle income is, your side hustle can push you into another tax bracket, where you could potentially be paying a higher tax rate as the amount of tax you will pay will be based on your self-employment and employment income combined.

Registering a side hustle in the UK

1. Choose between sole trader or limited company business structures. Both have benefits, so ensure you do the necessary research to decide on the best option for you.
2. Register for Self Assessment to notify HMRC of your self-employed status on the GOV.UK website.
3. You’ll be sent a Unique Taxpayer Reference (UTR) within 10 days which you’ll need to submit your tax return.
4. Using the UTR, set up a government gateway account to submit your tax returns online.

If you don’t pay income tax on your side hustle, HMRC might fine you. Late tax payments can accumulate interest, so clarify your tax obligations as soon as possible.

Claiming tax back on side hustles

You can reduce your side hustle tax bill by claiming allowable expenses. HMRC has a detailed list of coverable expenses. If you’re running a baking side hustle, your expenses might include ingredients or website costs; both examples of expenses covered by HMRC.

You’ll get tax relief based on what you’ve spent and the rate at which you pay tax. For example, if you claim £60 and pay a tax rate of 20%, you are entitled to £12 (20% of £60).

However, you can’t claim expenses if you use your £1,000 tax-free trading allowance – it’s one or the other.

There’s no need to panic if you’re just selling a few unwanted things online – it’s unlikely you’ll need to pay tax. But, if your side hustle starts turning into a flourishing business, you just need to make sure you’re aware of your tax obligations. The easiest way to do this is to keep all your finances in order and keep a record of everything.