Side hustle tax, what's it all about?

Rewind 10 years and most of us wouldn’t know what a side hustle was. But in 2024, the side hustle is a huge part of our working culture. Rightly or wrongly, we now live in a time where more budding entrepreneurs are turning their hobby, passion or skill into a tangible business. This is nothing new, but the idea of doing so alongside a traditional job that pays you wage has risen in popularity. Whether this is a result of social media, more access to funding or even the pandemic, this question alone could fill an article. However, in this article we’re not here to hypothesise on what caused the rise of the side hustle. Instead, we’re going to get down and dirty into the brass tacks by exploring how much you can earn on a side hustle before HMRC comes-a-knockin’.

Understanding Side Hustle Income

In simple terms, a side hustle refers to any extra income you make on top of your primary business or employment. From dog grooming, graphic design and floristry to e-commerce, recruitment or gardening, a side hustle really could be anything.

It is essential to differentiate between hobby income and business income, as the tax treatment for each can be significantly different.

Hobby Income vs. Business Income: If your side hustle is considered a hobby, you may not need to pay tax on the income. However, if it’s classed as a business, the income will be taxable. Distinguishing between the two usually depends on the intention behind the activity, the frequency of transactions, and whether you aim to make a profit. In the UK, HMRC looks at the factors below to determine if your activity is a business, including:

• Profit Motive: Are you engaging in the activity to make a sweet little profit?
• Frequency and Regularity: Are you conducting the activity regularly and with some continuity?
• Organisation: Do you operate in a business-like manner, maintaining records and marketing your services or products?
• Financial Management: Are you investing in your side hustle and managing it in a financially disciplined way?

Tax Thresholds in the UK

Being tax advisors, we have to be pretty up-to-date with this kind of stuff. So here are the tax thresholds as of 23/24.

Personal Allowance: In the UK, the personal allowance is £12,570 meaning you can earn up to this amount across all your income sources without paying tax. This only covers personal income such as self-employment income, however, if you have a limited company on the side, this allowance doesn’t apply.

Trading Allowance: There’s also a trading allowance of £1,000, so if your gross income from trading (before deducting any expenses) is £1,000 or less then you don’t need to inform HMRC or pay tax on this income. This isn’t per side hustle, this is across the board if you have one or more. I.e. if you have three side hustles all bringing in £500 each, HMRC would want to know about it, but £1000 of that would still be tax free.

Impact of Other Income: It’s also important to consider that these allowances apply to your total income. If you have other sources of income, such as a salary from your primary business, rental income, or investments, they’ll count towards your personal allowance. Any side hustle income EXCEEDING the remaining allowance will be taxable.

How different side hustles are treated differently from a tax perspective

Side hustles by nature can vary a lot, and depending on what type of side hustle you are running, it might have a different tax treatment.

• Freelancing: If your side hustle involves freelance work such as graphic design, floristry, consulting or content writing, will mean you’ll have to register this as self-employed income. This means, yes, you guessed it, you’ll have to pay national insurance and income tax on your profits.
• Online Sales: Selling stuff online through platforms like eBay, Etsy, or your own website can also be taxable. Whether you’re considered a casual seller or running a business affects how you’re taxed so make sure to consult your accountant on this one.
• Rental Income: If you rent out property, that income is taxable, but only for income tax. So what that means is rental income isn’t subject to National Insurance. But you can deduct expenses like repairs, and maintenance to reduce your taxable income.
• Investment Income: Earnings from investments, such as dividends or capital gains, have their own tax rules. It’s important to know the specific tax rates and allowances for these types of income.

Deductions and Expenses

One juicy perk of having a side hustle is the ability to deduct certain expenses from your taxable income, which can lower your tax bill. Knowing what expenses you can claim, and how to document them is key however. If in doubt, ask your accountant, or even better, speak to us, but for now, check out these points below:

• Allowable Business Expenses: Common deductions include stuff like office supplies, travel expenses, marketing costs, professional fees (like legal and accounting services), and home office expenses (if you work from home that is!)
• Examples of Common Deductions: For example, if you do freelance SEO copywriting, you can deduct the cost of software, a new computer, internet expenses, and any relevant training courses.
• Documentation: To claim these deductions, make sure you keep detailed records and receipts for all expenses. Make sure each expense is directly related to your side hustle and necessary for earning income. Sorry, that means no rogue purchases put through as expenses…

We come across countless new clients who haven’t been informed of everything available to them, missing out on some sweet tax savings. Get in touch to find out more.

When to Register and File Taxes

Knowing when to register your side hustle and file taxes is super important to avoid penalties.

You don’t want to get caught out, and it’s also not a great idea to bury your head in the sand.

• Registration Thresholds: You need to register with HMRC as self-employed if your turnover from self-employment is more than £1,000 during the tax year.
• Timeline for Registering: It’s best to register as soon as you start making money from your side hustle, even if your income is initially below the threshold to prepare for any income increases and avoid last-minute stress. (Keep in mind the deadline is 6 months AFTER the end of the tax year).
• Filing Deadlines: Keep the deadlines in mind for filing your tax returns and paying any taxes due. Missing these deadlines can result in penalties and interest charges, so don’t take any risks. For example, the deadline for online self-assessment tax returns is usually January 31st following the end of the tax year.

Penalties for Not Paying Tax

Not paying tax is never a good idea. If you don’t pay tax on your side hustle, you could be hit by penalties and land yourself in legal trouble.

Find out the difference between tax evasion and tax avoidance here so you don’t land yourself in hot water.

Types of Penalties: the seriousness of the penalties you get hit with will depend on how severely you’ve evaded tax. It ranges from penalties, fines, and interest on any unpaid tax, through to more severe consequences like criminal charges in the case of tax evasion.

The Importance of Speaking to a Tax Advisor

No matter what stage of your business journey you’re at, it’s worth seeking tax advice. As a budding side hustler, you want to make sure your ducks are all in a row before you get started. Even if you’re an experienced entrepreneur with multiple side projects, it’s always best to get fresh tax advice to ensure you’re operating in the most tax-efficient way. A good tax advisor (like ourselves, wink, nudge) will help you with:

• Regularly Setting Aside Money: Putting aside a portion of your income regularly helps cover your tax liabilities. This can prevent financial strain when tax payments are due, and with a tax advisor’s help you can make an accurate prediction of exactly how much you’ll need.
• Utilising Tax-Efficient Structures: Consider structuring your side hustle in a tax-efficient way. For example, forming a limited company might offer tax benefits compared to operating as a sole trader, depending on your income and expenses.
• Planning for Growth: As your side hustle grows, your tax situation may change. Regularly review your tax strategy and adjust it to accommodate increasing income and expenses.

To get even more golden nuggets like this, speak to one of our tax advisors today who’ll be able to assist you with your side hustle.