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Side Hustles UK: The Complete Guide to Tax For Employees with a Side Hustle. Learn how much tax you need to pay, etc.
Today we welcome a guest post from Katy B, a Chartered Tax Adviser (CTA) in the UK.
As more people work from home, there is an ever increasing percentage of UK adults who have side hustles.
The last time I checked, 25% of all UK adults had a side hustle according to research by Henley Business School.
That percentage was pre the current Pandemic, and is likely to be a lot higher now that working from home has become the new norm.
They also identified that 20% of people’s income was generated from side hustles.
Naturally, many people are confused about whether there is tax to pay on side hustle income.
So today we’re taking a deep dive to explore this topic properly.
I’ll now hand over to Katy!
Ken asked me to write an easy beginner’s guide to UK tax on side hustles, as for my sins I have spent 15 years (!) working in tax.
Can you believe what he said?
“Please keep things simple as tax bores people”.
I told him I was outraged 😆
I mean come on – what other walk of life has resulted in serious legal action involving the key question of “is a Jaffa cake a cake or a biscuit?”.
Or a classic case in 1929 involving an individual who bought one million toilet rolls (clearly the only person who saw Pandemic coming!).
Table of Contents
Side Hustles UK and Tax
The world of tax can be pretty weird and wonderful, but if you are starting a business or side hustle, what I want you to take away from this article is don’t let tax scare you.
For most of you in this position, it’s pretty straightforward if you follow my golden tax rules of thumb:
- Tax is fundamentally money in – money out
- Keep and regularly update your records in a way that makes most sense to you (seriously, not keeping up to date records is the cause of most problems later on)
- Keep a note of deadlines and file things well in advance
Let’s get down to business and break this tax stuff down!
Side Hustles UK: Assumptions Made
To keep things simple, we’re going to assume that you have a regular day job.
However, in order to run your side hustle or business, you need a legal structure.
You can therefore become both employed (through your job) and choose to either become a sole trader or create a Limited Company.
To keep things simple, we’re going to assume that you are a sole trader (i.e. you are self-employed, your own boss).
This is what most people will do at the start with a side hustle.
When Do I Start To Pay Tax on My Side Hustle?
A lot of people make the mistake of thinking that “side income” – such as coaching or blog income, or some Facebook/eBay selling – isn’t taxable.
The starting point is that any money you make from selling your time or a product can be taxable.
HMRC uses a concept called “the badges of trade” to work out if someone is in business and has taxable trading income.
We can simplify all this to: what’s your intention?
If you are starting a business to make profit, you’re clearly trading.
Also, If you have a regular side hustle such as coaching or (like me) a blog you want to monetise, you’re trading.
However, if you’re selling the odd item on Ebay when decluttering, you’re unlikely to be trading.
Although that income could still be taxable as casual or “miscellaneous” income.
Once you’re trading, you have trading income and you need to think about tax and registering your side hustle/business with HMRC.
There is a very useful exemption.
If your total trading or miscellaneous income is less than £1,000 in a tax year (6 April – 5 April) you don’t have to register as self-employed or pay tax.
This means that most people with casual income from eBay type sales, or the odd bit of consultancy income, don’t need to worry about tax on this income.
How and When Should I Register For Tax?
Once you are trading, you need to register with HMRC by 5 October following the tax year.
So, for example, if you start your business in December 2021, the tax year ends on 5 April 2022 so you need to register by 5 October 2022.
Ideally register as soon as possible so you’re not caught out with a fine.
It’s really simple to register with HMRC and the easiest way is online.
Just google “HMRC register for self-assessment” and select the “self-employed” option.
Once you’re registered, they will send you codes in the post so you can activate your online HMRC account.
Note that this also registers you as self-employed for National Insurance.
Once you’re registered, HMRC will send you a tax return every year until you tell them not to.
So if you stop your business or side hustle, don’t assume you can ignore a tax return because you’re no longer in business – you need to contact HMRC and deregister.
When Do I Have to File My Tax Return?
Your tax return needs to be filed online by 31 January after the tax year.
So your tax return for the current 2020/21 tax year ending on 5 April 2021 needs to be filed by 31 January 2022.
Don’t leave it to the last minute in case you need to get help or advice.
We’ll cover when you pay your tax bill a little later.
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What Tax Records Should I Keep?
I’ll start this with a confession: I’m rubbish at organising my own records.
Each year sees me scrambling through my emails for invoices and checking bank statements. Don’t be like me!
You need to keep full records supporting all your income and all your expenses.
Keep receipts, statements, invoices, emails, contracts.
The easiest way to think about it is: if someone asked you to prove a figure, can you do it?
Doing this as you go along is absolutely key (take it from someone who has learned the hard way!).
There are apps and software to help, but you can keep it as simple and cheap as you like.
A spreadsheet with tabs for “income” and “expenses” is perfect, and you can take pictures of all your evidence such as receipts.
Make sure you back all of this up!
For example, to a cloud service like Google Drive, DropBox or iCloud.
Watch: How To Start a Side Hustle SUCCESSFULLY With a FULL TIME JOB –
How Long Do I Need to Keep Tax Records For?
The rule is you need to keep records for 5 years after the 31 January when the return was due.
As this can feel a bit difficult to work out, it’s easier just to keep all your records for 7 years, then you’re covered.
How Much Tax Do I Pay?
Watch this detailed video, which shows you how to calculate your tax as a Sole Trader vs Limited Company:
You can also read more about this below but the video above goes into a lot of detail step-by-step.
How Do I Calculate My Tax Bill?
If you submit your tax return online, HMRC’s system calculates the tax due for you. Easy!
However, it’s really handy to make a rough calculation of your taxable profits (more below) as you go through the year so you can put the expected bill to one side.
You don’t want to get to payment time and realise you’ve spent it!
HMRC have pulled together a little tool to help you do this:
How Do I Calculate My Taxable Profits?
Your taxable profits are broadly your income, less your expenses.
Before we get into what do we mean by income and expenses, I must at this point, however, apologise.
We need to briefly dip our toes into the murky world of accounting (looking at you, Ken 🙂 ) as there’s a couple of terms to explain.
You can calculate your taxable profits on a cash basis.
This literally means that you only include something in your figures at the point the cash comes in or goes out of your door.
So if you send out an invoice on 5 April 2021 and it gets paid in June, you wouldn’t include it in your income figures for the tax return ending 5 April 2021 as you haven’t had the cash in.
It’s a LOT simpler to use the cash basis when you start out.
You can also calculate your taxable profits on an accruals basis.
This is the “proper” method and is what you must use if you set up a limited company, or for self-employed income over £150,000.
The accruals basis broadly works on what you firmly expect to receive even if you haven’t been paid yet, or what you firmly expect to pay out even if you haven’t paid it yet.
I’m going to assume you’ll use the cash basis and we can carry on with our explanations of income and expenses.
How Do I Calculate My Income and My Expenses?
Your income is your sales or turnover figure and is everything you earn.
This could be affiliate marketing, course sales, brand sponsorships, subscription income from your members, product sales, commission, consultancy fees, etc.
Your expenses are effectively everything it costs you to run your business.
For online businesses, this could include hosting costs, WordPress themes and plugins, upskilling training courses, a new computer, stationery etc.
You can also claim a reasonable proportion of your home expenses if you work from home such as broadband, electricity, etc.
For offline businesses, your expenses could also include items such as travel costs, material and equipment costs (e.g. food ingredients and equipment for a food business).
The advantage of using the cash basis as described above is that you can claim what are known as “capital” items as expenses straight away.
This is a whole subject in itself but essentially capital items are “enduring” items you expect to use over the longer term, such as computers and specialist equipment.
e.g. if you bought a serious food processor for a baking business.
There’s a good guide from HMRC, which goes through the various expenses you can claim.
Your taxable profits are calculated as your income, less your expenses.
If your expenses are more than your income, then you have a “taxable loss”.
You won’t have any tax to pay, but you can carry this loss forward against future profits.
Or in some circumstances, claim the loss against any other income you’ve earned in the year such as employment.
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The Trading Allowance
If your expenses are £1,000 or less, you may be better claiming the trading allowance than claiming actual expenses.
Let’s use some examples…
Your income is £3,000 and your expenses are £800.
In this scenario, your taxable profit would be £2,200.
It makes more sense to claim the £1,000 trading allowance.
Your new calculation is £3,000 less £1,000 = taxable profits of £2,000 which mean you pay less tax.
Your income is £3,000 and your expenses are £1,200.
Your taxable profit is £1,800.
Clearly it wouldn’t make sense to claim the £1,000 trading allowance as this would increase your taxable profit to £2,000.
I.e. £3,000 less £1,000.
You claim the trading allowance on your tax return when you file it.
Note that you get the full £1,000 even if you’ve not been trading for the full year.
Side Hustles UK: When Do I Have To Pay My Tax Bill?
The simple answer is the same time as you file your tax return i.e. 31 January following the end of the tax year.
However, there are some complications which can catch a lot of people out and they end up with an unexpected tax bill.
So I think it’s important to go into some detail here so you can be prepared. Let’s use some examples to help.
Dave, Jess and Keith all start side hustles/businesses for the first time in December 2020 which is the 2020/21 tax year as the tax year ends on 5 April 2021.
Their tax bills for this year are due on 31 January 2022, which is the same day as the tax return deadline.
HMRC assumes your tax bill will be the same year on year.
If your tax bill is more than £1,000 they want you to make a payment on account of next year’s tax bill on 31 January as well, so you can end up with a bigger bill than you expected.
Let’s work this through:
Dave’s business has an £800 tax bill. He has no other tax to pay.
As his tax bill is less than £1,000, he does not need to make a payment on account.
He pays his 2020/21 tax on 31 January 2022. Job done.
Jess’s business has a £1,200 tax bill. She has no other tax to pay.
As her tax bill is more than £1,000, she will need to make payments on account of next year’s bill.
This works as follows:
On 31 January 2022 she pays her initial £1,200 tax bill for the 2020/21 tax year.
– Then on 31 January 2022 she must also pay her first payment on account relating to the next tax year i.e. 2021/22.
– HMRC assume her tax bill for that year will also be £1,200, and they want 50% of that paid on 31 January 2022.
So she will actually pay £1,800 on 31 January 2022.
– The other 50% is due on 31 July 2022.
– Finally, she will file her tax return for 2021/22 on 31 January 2023 which will “true up” the final amount actually due for the 2021/22 year.
She may need to pay more tax, or claim a refund.
On 31 January 2023 she will also have to pay 50% on account of the following year, based on her 2021/22 tax return figures, so the process starts all over again.
Keith’s business also has a £1,200 tax bill.
He is also employed during the year and has paid £7,000 in PAYE (payroll) tax throughout the year.
There’s a special rule that says if you have paid more than 80% of your total tax bill from deductions at source (e.g. PAYE) then you don’t need to make payments on account.
Keith’s total tax bill is £8,200 (£1,200 + £7,000).
80% of £8,200 is £6,560, and Keith has paid more than this in PAYE tax.
This means he doesn’t mean to make payments on account.
You can apply to HMRC to reduce your payments on account if you know your taxable profit will be lower and you can do that as part of the tax return process.
National Insurance and Self-Employment
So far we’ve been discussing tax but there’s another very important element: National Insurance (NI).
NI pays towards your state pension and other benefits, and you don’t want to lose out.
It’s a whole topic in itself but as a summary, for most readers there are three relevant types or “classes” of NI:
1. Class 1 NI: this is what you pay as an employee.
If you earn more than £120 a week / £520 a month, your earnings count towards all
2. Class 2 NI: this is what you pay if you are self-employed.
It’s a flat rate of £3.05 a week. If your side hustle profits are less than £6,475, you don’t
have to pay Class 2 NI by applying for a “small profits” exemption from HMRC.
Class 2 NI counts towards some state benefits.
3. Class 4 NI: you also pay this if you are self-employed.
It is paid at 9% on your profits between £9,501 – £50,000, and at 2% on your profits over
£50,000. While this is called NI, this is really an additional tax and it doesn’t count
towards any state benefits.
The important points to take away are:
- Class 2 and Class 4 NI are paid with your self-assessment tax return so it’s important to budget for this. Class 4 NI is also included in the payments on account calculation.
- If you are only self-employed and your profits are below the £6,475 Class 2 “small profits” threshold, it’s a good idea to voluntarily pay Class 2 NI anyway so you build up your state benefits entitlement.
- If you are employed AND self-employed, depending on your employment earnings you may not need to pay Class 2 or the full amount of Class 4 NI – you don’t want to overpay!
Whether Or Not To Register For VAT
Broadly, you only have to register for VAT when your income hits £85,000.
You can, however, choose to register and this can be helpful if you have a lot of expenses, as it means you can reclaim the VAT you paid on these expenses.
If you’re registered for VAT this means you have to in turn charge VAT on your sales.
This makes things 20% more expensive for your customers if they are individuals and makes you less competitive.
A good rule of thumb is:
– If you’re selling to individuals, it’s best not to register for VAT, especially at first – it’s more admin and makes your products more expensive.
– If you sell to businesses who are themselves VAT registered, consider registering for VAT as it makes you seem a larger, more professional business and they can usually reclaim the VAT you charge them, so they have no issue paying it.
More Resources on Side Hustles UK Tax…
I really hope tax on side hustles now seems less of a scary subject.
All the information here is up to date for UK tax law as of 2020/21 and is intended to set out the broad principles.
Please always do your own research based on your specific circumstances and take professional advice if you need to from a qualified Tax Adviser (look for CTA or ATT in their title) or a Chartered Accountant specialising in tax matters.
The Low Incomes Tax Reform Group does a brilliant series of guides for self-employment which you can find here. I recommend you read.
Good luck! 😀
About Katy B:
I’m really honoured to share a guest post on The Humble Penny. Ken’s posts inspired me to set up my own blog which is work in progress. My blog’s aim is to make office life better for everyone by sharing what I’ve learned about working, organisations and management in a very practical and fun way, and getting your views and ideas too so we have a giant living research project to help all of us to make the most of our working lives.
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