More people than ever are turning to a side hustle to supplement their main income. Making money from a hobby or side project is a fun way to build your skills, monetise your free time and, of course, make some extra money.
In fact, some people are even turning their side incomes into their main source of finances. (No problem if you’re not there, it’s just good to have some extra money on the side, right?)
But what about if you’re looking at your hobby income and wondering if you need to declare that? Or even if the tax man would care whether you did or didn’t?
There is a lot of mixed info out there about the world of declaring your side hustle profits in the UK. So, we’ll take a good look and explain the deal with paying tax on your hobby income.
A side hustle is generally seen as any source of income that comes as a supplement to your day job and main pay packet. So while you might work monday to friday and make a decent wage, you might also supplement your pay by making some money on evenings and weekends.
Popular side hustles can include:
Of course this is just a small list of the jobs people can earn a side hustle income from. The general rule is that if you’re making money from something other than your job, that is considered a side hustle or hobby income.
Read our guide to making money from creative ideas...
While you do need to declare your side hustle income to HMRC, you actually don’t need to pay tax if it is under £1000 per year, or around £83.34 per month (assuming you earn that consistently for a whole year).
This means that if you’re selling old items at a car boot sale or on eBay, or even offering a casual service then you most likely won’t need to declare it.
However, if you don’t have a day job or main source of income, then you can make up to £12,570 in a year before you have to declare it as taxable income. Once you start making above this then, yes, you will be subject to self assessment income tax.
Now… It can get a little complex here, so we’ll look at sources of side hustle income and how they fare when it comes to paying tax.
If you take on a second job, for example you work in a bar after hours, then this job will most likely be a PAYE job. This means that your pay will be taxed automatically before you receive your payslip.
However, if you do regular casual work such as garden maintenance, building site labouring or other ‘cash in hand’ jobs then you will need to declare this via self assessment.
If you own your property then you might have the option to let out a spare room to a tenant, or even on Airbnb. Another popular way to make money from your property is to let our driveways or parking spaces, especially if you’re in a good location for commuters.
You can earn £7500 under the government’s Rent a Room scheme before you need to declare it to the tax man. However if you split this income with someone else, for example the other person named on your mortgage, then that is halved to £3750.
As for parking spaces and driveways: this comes under the £1000 per year bracket. So if you make more than £1000 a year from your driveway or parking space, you will need to declare it.
If you trade stocks and shares, or dabble in crypto trading, then this is another area where you will need to be careful. Financial trading, including forex, stocks and cryptocurrency, is seen is as a taxable job.
So if you are earning income from your side hustle as a financial trader then, first of all, well done. And secondly, you will need to declare your gains as self assessment.
If you are not trading, but are holding assets and withdrawing profits then you will also need to declare this as capital gains tax. However this works both ways; so if you make a loss you can also claim this against your payable tax. We'll look more at expenses in a moment...
If you’re making money above the thresholds above then yes, you will need to register with HMRC to pay self-assessment tax.
You normally have around one year's grace to register for self-assessment. So if you have started your side hustle in September and you made over £1000 in that month you’ll need to register for self-assessment before the 5th October.
You will then need to complete a self assessment tax return any time after April the 5th the following year, until the self assessment deadline of 31st January.
And yes, there are penalties for not declaring income or incorrectly declaring your side hustle income.
While making extra funds is great, chances are you are also spending money to make money. Expenses are one of the best ways to keep your taxes down, and you declare various things on your self assessment tax return to reduce your tax liability.
Another way to keep taxes down is by declaring losses. This might include investments in equipment that cost more than you earned, or it might be from another expenditure such as a financial investment that lost value after you bought it.
Once you have put expenses through, these come off your total taxable income.
So for example, if you make £15,000 from sales but you spent £3,000 on assorted expenses, your taxable total income is £12,000.
However you also subtract your £1000 limit and this leaves you with £11,000 which you will need to declare as taxable income.
The basic level tax on earnings in the UK is 20%, so you will need to pay £2,200 tax on this additional income, assuming you earn under £50,270 in a year. Income tax rates will climb if you earn over this, including your hobby income.
However, if this is your only source of income, you will only need to pay tax on the total taxable amount over £12,570.
Read our guide to what expenses can I claim?
One of the main things to bear in mind as your side hustle grows is that your financial recordkeeping can get much more complex. As you take on more clients, spend more for materials and costs and keep track of expenses and income, it can quickly get confusing.
And if the aim of your side hustle is to eventually make it your main source of income, make sure to keep accurate records and use software, such as cloud accounting software.
If you need help managing your additional sources of income, for example completing tax returns, an accountant can offer a cost effective solution.
Here at Henderson and Co Accountants, we offer fully bespoke accounting packages to businesses of all sizes, including sole traders, freelancers and solopreneurs. Our team of accountants in York and Northern Ireland are here to help.
Whether that’s doing your self assessment tax or helping you get set up for cloud accounting, get in touch for a chat.
