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Side hustle taxes
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Do I have to pay tax on my side business? | Side hustle taxes

Many people are really feeling the pinch at the moment, while the chances of getting a pay rise to cover budget-busting cost-of-living price increases are slim in most cases. With many no doubt looking for other ways to boost their income, the answer could be to start a “side-business”.

Alternatively called a “side-hustle” or “side gig” (both more common in the US), a side-business is simply a business that you run in your spare time or even while you’re doing your job. A popular option is a “dropshipping” side-business, which is where you sell products online without storing or processing them, because your supplier(s) takes care of both. But before you start your own side-business, you need to know the tax implications.

Do I pay tax on my side-business income?

If you’re buying stock to sell or raw materials to make into things to sell to paying customers, you’re trading and earning income from self-employment. That’s true if you’re selling a service, whether it’s guitar lessons, cleaning patios, translation work, freelance writing or whatever.

Fortunately, your first £1,000 of side-business gross income (ie total sales or revenue) is tax-free, because it’s considered casual or miscellaneous income. This is called your trading allowance. So, you could run a seasonal side-business, say, and make an extra £1,000 tax-free, without having to declare it.

However, once your side-business gross income goes over the £1,000 threshold, it can be subject to tax, depending upon how much taxable income you earn from all other sources.

Side hustle taxes: What if I register as a sole trader?

If you start a side-business on your own (ie without a business partner), you can register as a sole trader. It’s free and quick and easy to do. Most people set up a sole trader business (they make up 56% of the UK’s 5.5m business population). A word of warning. As a sole trader, in law, you and your business are the same thing, which makes you personally liable for your business debts. If you don’t plan to build up much debt, it’s less of a risk.

  • You set up as a sole trader by registering for Self Assessment via government website GOV.UK.
  • If you haven’t registered before, you must do so before 5 October in your side-business’s second tax year, otherwise HMRC (the UK tax authority) could fine you. The UK tax year runs from 6 April until the following 5 April.
  • Each year you’ll need to report your taxable income and any tax expenses you wish to claim to HMRC via a Self Assessment tax return (the SA100) plus supplementary page SA103.
  • The Self Assessment online filing deadline each year is midnight on 31 January. Miss it and you immediately face a £100 fine.

Side hustle taxes: What if I set up a limited company?

To protect themselves from personal financial risk, some people register their side-business as a private limited company (there are 2.1m of them and they make 37% of the total UK business population). Because a limited company is a separate legal entity, you’re not normally personally liable for the company’s debt, your potential loss is restricted to the shares you own and any personal cash you invest.

You can also set up a private limited company via GOV.UK. Limited companies pay Corporation Tax (19% for 2023/24 tax year) on their profits, while Income Tax and National Insurance contributions (NICs) may be payable on any salary the limited company pays you, while tax may also be payable on share dividend payments you receive.

  • Read “Sole trader or limited company?” to find out more about the pros and cons of setting up as a sole trader versus registering a limited company.
  • If you’re interested in setting up a side-business with someone else, visit GOV.UK for information about how to set up an ordinary business partnership and the tax responsibilities it brings (there are 353,000 ordinary partnerships in the UK and they make up 6% of the total business population).

How much tax will my side-business pay?

As a sole trader, you’re taxed based on your net profits (ie your actual profit once all business costs have been deducted). “Allowable expenses” (explained further on) are deducted from your side-hustle income and once any tax allowances have been accounted for and your other taxable income factored in (including income from your job), HMRC will work out your tax bill.

You must provide summaries of your side-business income and expenses to HMRC via your SA100 tax return and SA103 supplementary page (that’s why it’s called “Self Assessment”).

You will be taxed on your side-business income according to the Income Tax band into which your total taxable income falls. In addition to your trading allowance, you do not pay Income Tax on your first £12,570 of gross (ie total) taxable income, because this is your tax-free Personal Allowance. 

  • You’ll pay the basic rate of Income Tax, which is 20%, if your total taxable income is between £12,571 and £50,270.
  • You’ll pay the higher rate of Income Tax, which is 40%, if your total taxable income is between £50,271 and £125,140.
  • You’ll pay the additional rate of Income Tax, which is 45%, if your total taxable income is more than £125,140.
  • 2023/24 tax year for all figures quoted above. Income Tax bands and rates are slightly different in Scotland.

The Personal Allowance decreases by £1 for every £2 of net income you earn over £100,000 and if your net income is £125,140 or more, you don’t get any Personal Allowance.

Is National Insurance payable on side-business income?

Despite already paying Class 1 National Insurance contributions (NICs) on your employed income via your employer’s payroll, as a sole trader, you may also have to pay Class 2 and Class 4 NICs.

For the 2023/24 tax year, the Class 2 NIC rate is £3.45 a week, which you’ll need to pay if your profits are over £12,570. You’ll also have to also pay Class 4 NICs of 9% until your profits reach £50,270, after which you pay 2% on any further profits.

What side-business tax expenses can I claim?

Sole traders can claim for a wide variety of legitimate costs they pay to start and run their business. These are called “allowable expenses”. If you use something for your side-business and personal reasons, such as your mobile phone, you can only claim for the business-cost proportion. Allowable expenses can include…

  • Premises costs

    If you take on premises to operate your side-business, you may be able to claim for rent, heating, lighting, water, business rates, phone and broadband.

  • Share of domestic bills

    If you run your side-business from home, you may be able to claim a proportion of your heating, electricity and water costs, Council Tax, mortgage interest or rent, broadband and telephone use. If working out exact costs is too complicated, you can claim flat-rate simplified expenses for working from home. 

  • Wages

    You can claim for business-related fuel, parking, train or bus fares, but you can’t claim allowable expenses for journeys to and from your normal place of work, that’s classed as your commute. Should you prefer, you can claim flat-rate simplified expenses for vehicle use. 

  • Other costs

    Raw materials or stock, printing, packaging, postage, office stationery, advertising and marketing, insurance and bank charges, training and professional membership fees.

  • Disallowable expenses

    You cannot claim for entertaining customers or travel costs to and from your normal place of work. Neither can you claim for parking and speeding fines, a business suit, food or alcohol (unless you have be away from home overnight on business,for example, if you went to a trade show, in which case you can claim for sustenance).

  • Capital allowances

    If you use “traditional accounting” methods (ie you record income and expenses by the date you invoiced or were invoiced), you claim capital allowances after buying equipment, machinery or a vehicle for your side-business. If you use “cash basis accounting” (ie you only record income and costs in your accounts when you are paid or pay money out) and buy a car, you can claim this as a capital allowance, but everything else must be claimed as an allowable expense.

What tax records must I keep for my side-business?

HMRC requires you to maintain accurate, up-to-date business records, detailing your sales and expenses. Keep copies of all invoices you send, as well as receipts and invoices for things you claim as tax expenses. If you plan to claim for fuel costs, keep a detailed mileage log, showing distances travelled, locations and dates/times.

HMRC can charge you a penalty if your records are not accurate, complete and legible and you must keep them for at least five years after the 31 January online tax return deadline following the end of the tax year to which they refer.

Registering a side-business for VAT

The VAT threshold for 2023/24 is £85,000. If your side-business sales are more than £85,000 in 12 months or you expect your VAT-taxable turnover for 12 months to go over £85,000 in the next 30 days, you must register your side-business for VAT.

Even if your turnover isn’t above £85,000 or anywhere near, if you’re being charged VAT on your business purchases, it can be worth registering for VAT voluntarily. However, be aware that once registered, you must maintain detailed VAT records and report your VAT data digitally to HMRC every quarter.

Once registered, you can apply VAT to VAT-able products or services. If you charge more VAT than you’re charged, you’ll need to pay the balance to HMRC. HMRC will repay you the difference if you pay more VAT than you charge. 

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