A side hustle refers to any additional work or business activity outside of one’s primary job to earn extra income. In recent years, side hustles have become increasingly popular in the UK as more people look to supplement their income. From freelancing gigs to selling handmade crafts online, the opportunities to generate extra cash on the side are endless.
However, many side hustlers do not realize that this additional income is still taxable. Just because it’s a side job does not mean you can avoid paying taxes on the money earned. Understanding the tax implications is important for anyone starting a side hustle to ensure proper compliance with HMRC and avoid any penalties down the line. This beginner’s guide will explain the key things you need to know about filing taxes for income from a side hustle.
What is a Side Hustle?
A side hustle refers to any secondary job or small business operated in addition to one’s regular employment. Common examples include:
- Rideshare driving for Uber or Lyft
- Selling products on Etsy or eBay
- Monetizing a blog through affiliate marketing and ads
- Consulting, freelancing, or tutoring services
- Renting out property on Airbnb
The appeal of side hustles is the ability to earn extra income on flexible terms. Side hustles allow people to turn hobbies, skills, and assets into money-making opportunities.
The Rising Popularity of Side Hustles in the UK
Side hustles are growing in popularity throughout the UK. Recent data shows:
- 33% of UK adults currently have a side hustle.
- 25% of full-time workers run a side business in addition to their job.
- The average monthly side hustle income is £560.
- Top side hustle categories include online selling, IT consulting, and creative work.
Millennials are especially likely to take on side work, valuing the flexibility and desire for extra income. But side hustles span generations, with many boomers and older adults taking on consulting gigs, renting properties, and more. The COVID-19 pandemic also accelerated side hustling, with workers seeking new income streams after job losses or furloughs.
Understanding the Tax Implications
The key thing to know about income from side hustles is that it is considered taxable. Even if it seems like a small hobby or occasional gig, the money you earn may be subject to income tax and National Insurance contributions. Failing to report side hustle earnings could result in penalties and extra taxes if caught by HMRC.
Tax Implications of Side Hustles
To avoid problems, here are some important facts to understand about how side hustle income is taxed:
Side Hustle Income is Largely Untaxed Initially
Unlike traditional employment, there is usually no PAYE (Pay As You Earn) tax withholding on side hustle profits. For example:
- Earnings from freelance work or assets you rent out are not subject to PAYE.
- Income from sites like Etsy may not have taxes withheld initially.
- You keep your full side hustle income when first earned.
This means you are responsible for keeping track of your earnings and reporting this to HMRC.
You Must Inform HMRC and Submit a Self Assessment Tax Return
Given the lack of upfront tax deductions, it is your responsibility to inform HMRC about additional income from side hustles. This is done through filing a Self Assessment tax return on an annual basis.
All income from side work exceeding £1,000 per year must be reported. The Self Assessment filing thresholds for 2023-2024 are:
- £1,000 threshold for trading/self-employment income
- £1,000 threshold for rental property income
- £1,000 threshold for savings or investment income
Unless your side hustle earnings are under these low thresholds, you will need to complete a tax return.
Keep Records Like Invoices, Receipts, and Bank Statements
To report your side income accurately, be sure to keep detailed records of any invoices, receipts, bank statements, and other tax documents. Having orderly records makes filing your tax return much smoother.
Ideally create an organizational system early on to collect important tax documents throughout the year. Keep digital and/or paper copies in case HMRC wants additional verification of your reported income and expenses.
The Self Assessment Tax Return System
Self Assessment is the system used by HMRC to collect income tax from individuals who earn money outside of traditional employment. This includes those with side gigs.
The key steps in the Self Assessment process include:
- Registering for Self Assessment – Generally done online via the HMRC website. This creates your government gateway account.
- Filing a tax return online by the deadlines – For the 2022-2023 tax year, the deadline is 31 January 2024. You report all taxable income from the prior year.
- Paying owed taxes – Any income tax owed must also be paid by 31 January. You can choose to pay the full lump sum at once or arrange for installment payments.
- Maintaining records – Keep invoices, receipts, and other tax documents for at least 5 years. These may be requested by HMRC to verify your reported income and expenses.
Complying with Self Assessment ensures you stay compliant with the tax obligations related to your side hustle.
The £1,000 Trading Allowance for Side Income
One tax perk for small side hustles is the £1,000 trading allowance. This means your first £1,000 in gross trading or self-employment income each year is exempt from income tax and National Insurance contributions.
It is an automatic allowance – you do not need to claim anything. If your side income exceeds £1,000 per year, you pay taxes on the full amount. But if it is less than £1,000, you likely have no tax liability.
The trading allowance applies per individual, so tax-free side income could be up to £2,000 per couple. It cannot, however, be used for rental property income.
Gambling Winnings are Tax-Free Below Certain Thresholds
One notable exception to taxes on side income relates to gambling winnings. Small-scale gambling winnings are not considered taxable income.
The tax-free gambling income thresholds for 2023-2024 are:
- £5,000 per year tax-free for general gambling winnings
- £10,000 per year tax-free for lottery winnings
- £1,000 per year tax-free for bingo/pool/poker tournament winnings
But consistent gambling income over these levels may be subject to taxes. Reach out to an accountant to understand gambling tax obligations.
Income Tax and National Insurance Rates
The amount of income tax and National Insurance you’ll pay on side hustle earnings depends on your total income amount and current tax band.
For 2023-2024, the income tax bands and rates in England, Northern Ireland, and Wales are:
| Band | Taxable Income | Income Tax Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571 to £50,270 | 20% |
| Higher Rate | £50,271 to £150,000 | 40% |
| Additional Rate | Over £150,000 | 45% |
National Insurance has additional thresholds and rates:
- No NI on first £12,570
- 12% NI between £12,570 and £50,270
- 2% NI above £50,270
So your total tax burden on side income can range from 0% up to around 47% depending on earnings. An accountant can help calculate estimated taxes owed.
Navigating Side Hustle Taxes
Once you understand the basic tax implications, here are some key steps for staying compliant:
Platforms Are Sharing Seller Information With HMRC
Many popular side hustle platforms like Etsy, eBay, Airbnb, and Uber are now legally required to share user income data directly with HMRC. So don’t assume your side gig earnings are unknown to tax authorities.
New Tax Rules Are Coming in 2024
In April 2024, expanded tax rules for platforms come into effect in the UK. Sites facilitating over £10,000 in annual sales per user must calculate, collect, and pay over income tax on sellers’ earnings.
This will significantly increase income reporting to HMRC from the sharing/gig economy. If you earn over £10k, taxes will be withheld upfront on earnings rather than relying on individual compliance.
Keep Accurate Records and Report Income Properly
Given the increased tax scrutiny on side hustles, it is crucial to keep accurate income and expense records. Report all taxable earnings transparently on your Self Assessment returns. Trying to hide income is likely to trigger audits and back taxes.
Treat Your Side Hustle as a Business
Even if it feels like a hobby, your side gig should be treated as a business in terms of taxes. Deduct legitimate business expenses, keep receipts, and conduct yourself professionally. But also recognize tax obligations as a self-employed sole trader.
Learn the Rules and Seek Help if Needed
Make an effort to learn the latest tax rules and guidance from HMRC that relate to your type of side hustle. If you are unsure about anything, seek help from an accountant or tax advisor. They can ensure you file accurately while maximizing deductions.
“Keep in mind that your side hustle, no matter how small, may still be a business in the eyes of tax authorities. This means that any income you generate may be subject to tax.”
Here is a table summarizing income tax obligations on side hustle earnings:
| Annual Earnings | Income Tax Due |
|---|---|
| Less than £12,570 | 0% |
| £12,571 to £50,270 | 20% on amount above £12,570 |
| £50,271 to £150,000 | 20% on amount between £12,571 to £50,270 + 40% on amount above £50,270 |
| Above £150,000 | 20% on amount between £12,571 to £50,270 + 40% on amount between £50,271 to £150,000 + 45% on amount above £150,000 |
Conclusion
Although juggling a side hustle can be rewarding, it is critical for side giggers to educate themselves on the related tax implications. Failing to properly report and pay taxes on additional income from freelancing, selling goods, property rental, and more can lead to problems with HMRC down the road.
By learning the key rules around Self Assessment returns, income tax bands, National Insurance, recordkeeping, and more, side hustlers can stay compliant and avoid any penalties. Seeking guidance from a tax advisor is highly recommended for anyone earning sizable income from side work and unsure about their obligations. Overall, approaching your side hustle like a real business will set you up for success both financially and in the eyes of tax authorities.