Whether you want to transition to full-time self-employment or earn a bit of extra cash in your spare time, there are lots of reasons to start a side hustle.
But before you start building the next big thing, you’ll need to consider your side hustle tax. UK side hustlers have certain tax obligations, depending on how much they earn.
In this guide, we’ll talk you through everything you need to know about paying side hustle income tax in the UK. So you can master your side hustle taxes and focus on your business.
What's the difference between a job and a side hustle?
Put simply, a side hustle is something you do on the side of your job to earn extra income.
Here’s what that could look like:
- You work a full-time job as a dental nurse. Out of hours, you crochet clothing items to sell on Etsy.
- You work a part-time job as a PR executive. Out of hours, you’re a freelance writer for the pharmaceutical industry.
- You work a full-time job as an electrician. Out of hours, you run a pet-sitting service.
The difference between a job and a side hustle in the eyes of HMRC is how much you earn.
Earnings of less than £1000 in one tax year are not considered taxable income. So you won’t need to register as self-employed or declare this income to HMRC.
Do you have to pay taxes on a side hustle?
Yes, if you’re earning more than £1000 from your side gig in a tax year. Employees usually pay taxes on their income through PAYE, but running a side hustle is different.
To pay taxes on side hustles, you’ll have to register as self-employed via HMRC and submit a self-assessment tax return.
How much can you earn as a side hustle before paying tax?
Everyone in the UK has a tax-free trading allowance of £1000 in additional income, outside of their regular employment. This means, if you’re employed full-time by a company and earning less than £1000 from your side hustle, you don’t have any additional tax obligations.
How to pay tax on side hustle
If you’re employed, tax is automatically deducted by your employer. Having a side hustle that earns you over £1000 in a tax year means you’ll have to complete a self-assessment tax return for this income source.
Side hustle tax deductions
If you’ve been asking yourself ‘how do I pay taxes on a side hustle?’ you’ll be pleased to know, side job taxes are covered by the self-assessment system. The amount of tax you 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 on your self-assessment tax return, so HMRC can see how much tax and national insurance you’ve already paid.
It’s worth noting that side hustle income can push you into another tax bracket, where you’ll pay a higher tax rate. This is because the amount of tax you pay is based on your self-employment and employment income.
How do I register a side hustle UK?
When it’s time to register your side hustle with HMRC, there are a few steps you need to follow. Let’s break them down:
- First, decide on your business structure. You have the choice between sole trader or limited company business structures, and both have their benefits. Make sure you research both set-ups to figure out which one will be best for your business.
- Next, you’ll need to let HMRC know you’re self-employed. You can do this on the gov.uk website.
- After you’ve registered with HMRC, you need to register for self-assessment. Your self-assessment tax return is used by HMRC to calculate your tax liabilities.
- You’ll be sent a Unique Taxpayer Reference (UTR) in the post within 10 days of registering for self-assessment. Keep this safe; you’ll use it to submit your tax return.
- Using your UTR number, set up a government gateway account so you can submit your tax returns online.
What happens if you don’t pay tax on your side hustle?
If you don’t pay income tax on your side hustle, HMRC might fine you. Late tax payments can accumulate interest, so the longer you put off paying, the more you’ll owe.
Claiming tax back on side hustles
As you might already know, side hustles come with unique running costs. You can reduce your side hustle tax bill by claiming allowable expenses. HMRC has a detailed list of what these expenses can include. If you’re running a baking side hustle, your expenses might include ingredients, website costs, and fuel for your delivery vehicle.
You can claim this if you spend money from your profits on business expenses. Expenses are deducted from your total income, and you’re only taxed on your profit. For more information, read our guide to claiming allowable expenses.
Making Tax Digital and side hustles
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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