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

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.

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.

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 (with a small profits rate of 19% for the 2024/25 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).

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.
• 2024/25 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.

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 and Class 4 NICs or may choose to pay Class 2 NIC voluntarily.

For the 2024/25 tax year, the Class 2 NIC rate is £3.45 a week. You’ll have to pay Class 4 NICs of 6% until your profits reach £50,270, after which you pay 2% on any further profits.

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.

The VAT threshold for 2024/25 is £90,000. If your side-business sales are more than £90,000 in 12 months or you expect your VAT-taxable turnover for 12 months to go over £90,000 in the next 30 days, you must register your side-business for VAT.

Even if your turnover isn’t above £90,000 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.