5 useful things you need to know about paying tax on a side-hustle

The “side-hustle” has become a common part of our culture in recent years – especially since the Covid-19 pandemic began. It describes a stream of income earned on top of a full- or part-time wage, helping the individual keep pace with rising costs, pay debts, or save for the future.

Indeed, Aviva reports 1 in 5 Brits has started a side-hustle since March 2020. The report claims the average income was £497 a month for side-hustlers, equating to a generous additional income of £5,964 a year.

If you’re considering starting your own side-hustle, it’s important to understand the tax implications of this project. Having an additional revenue stream could change your life, but it’s crucial to know how your tax bill might change as a result.

Read on to find out five useful things you need to know about tax if you’re setting up a side-hustle.

1. You get a £1,000 tax-free trading allowance as a self-employed side-hustler

First, it’s important to clarify the difference between a self-employed side-hustle, and taking on an additional part-time job as an employee.

If you take on another job with an existing institution, you will pay Income Tax through PAYE. Even though it’s a second stream of income, you won’t need to declare this to HMRC – it’s already been done for you.

However, a self-employed side-hustle, such as selling goods online, tutoring, providing freelance services, or even being a social media influencer, requires more action as far as tax is concerned.

Importantly, a trading allowance of £1,000 is applied to anyone selling goods and services on a self-employed basis, on top of your £12,570 Personal Allowance that will usually be taken up by your full-time income.

So, if you make less than £1,000 a year from your side-hustle (with expenses deducted), you won’t need to pay Income Tax on it, as it falls within the trading allowance. For instance, if you have an online business selling second-hand items from around your home, it’s highly unlikely you will exceed a £1,000 profit margin.

However, any amount more than the trading allowance will be subject to Income Tax, and crucially, earning above the threshold means you’ll need to register as a business.

For the 2022/23 tax year, the registration deadline is 5 October 2023, and your self-assessment tax return should be filed by 31 January 2024.

2. Making money online counts as a side-hustle

In the modern world, there are countless ways to earn an income on top of your usual full-time employment.

According to Aviva’s research, some of the most popular side-hustles can be conducted online, including:

• Selling hand-crafted goods (23% of participants cited this as their side-hustle)
• Freelance jobs, such as copywriting, translating, or tutoring
• Social media influencing.

So, it’s important to remember that your business doesn’t need a separate premises to be taxed. Any self-employed revenue you make above the £1,000 trading allowance is likely to be subject to Income Tax – even if you don’t step out of your front door to earn it.

According to The Times Money Mentor, HMRC has had access to PayPal since 2016, after 870,000 people failed to self-assess. It’s important to declare your income honestly when starting a side-hustle, even if you only make money through PayPal or a similar payment application.

3. Renting a room out could be a hugely tax-efficient side-hustle

If you have a furnished spare room in your home, you could turn it into a tax-efficient side-hustle.

Indeed, the usual trading allowance doesn’t apply to those renting a room to lodgers, including Airbnb landlords. Instead, under the government’s Rent a Room Scheme, the first £7,500 of rent a year can be earned tax-free.

So, if you charged £625 a month or less to a lodger, or your Airbnb earnings equalled this amount or less each month, you wouldn’t pay Income Tax on this side-hustle at all.

If you and your spouse rent out a room in your shared home and both wish to benefit from this tax break, the £7,500 allowance is split between you. So, ensure you are careful not to exceed the threshold if sharing the profits.

In addition, some people rent out a parking space or driveway as a side-hustle. The usual trading allowance applies here, not the increased tax exemption given under the Rent a Room Scheme.

4. Your side-hustle earnings are calculated at your marginal rate of Income Tax

The amount of Income Tax you pay above the trading allowance, or the £7,500 exemption for renting a spare room, is calculated at your marginal rate. So, if you already earn a full-time salary, your side-hustle earnings are added to that, not calculated separately.

For example, if you earned £45,000 a year from full-time employment, you would pay basic-rate (20%) Income Tax.

If you then earned £10,000 net from selling hand-crafted goods online, your total earnings would be £55,000 – meaning your income now sits above the £50,270 basic-rate threshold (including the Personal Allowance). You would then pay higher-rate (40%) Income Tax on the amount earned above £50,270.

So, when starting a side-hustle, it is crucial to factor in your planned earnings with your full-time salary to ensure you are not inadvertently increasing your tax bill.

5. Working with an expert can help you earn additional income tax-efficiently

If you are considering starting a side-hustle to save for your future, build your investment portfolio, enjoy more luxuries, or simply to cover costs, it’s important to understand how these earnings might affect your tax situation.

Being unprepared could mean you are pushed into a higher tax band. What’s more, losing track of your earnings over the year could mean you find it difficult to complete a self-assessment form when the time comes.

Fortunately, working with a financial planner can help.

We can:

• Review your tax situation as it stands, and offer advice on how a side-hustle might affect it in the years to come
• Inform you on the tax breaks available to your particular side-hustle
• Support you in routing your additional earnings as you see fit – whether it’s saving for a new property, boosting your pension contributions, or passing the funds on to the next generation
• Help you prepare for self-assessment.

Speaking to an expert before you begin your side-hustle could mean you have a clear picture of your financial circumstances for the year ahead.

Get in touch

To find out how we can help with your side-hustle, please email us at enquiries@blackswanfp.co.uk or call 020 3828 8100 today.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.