Hustles and tax

A “side hustle” is the term given to a job or activity that brings in extra income, alongside a main employment. In recent years, side hustles have become increasingly popular. A huge rise was seen through Covid, as work habits and priorities changed and some turned hobbies into businesses. (For examples see my article From pastime to fulltime – How to turn a hobby into a job)

In addition to this, people are turning to selling their no longer wanted items in a bid to make money and to be environmentally friendly.

But what are the tax rules on these side hustles?

On 1 January 2024 new rules regarding tax came into force. In fact, the changes do not affect individuals in any way. However, alarming headlines about a “side hustle tax” and a lack of clarity have caused huge confusion and worried many people. So, what are the rules regarding side hustles and tax?

What are the tax allowances?

You already have a “trading allowance” of £1,000 a year, in addition to the personal allowance of £12,570. HMRC introduced the concept of a trading allowance in 2017.

Your personal allowance may be different if you claim marriage allowance or blind person’s allowance or your annual income is more than £100,000.

See Income Tax rates and Personal Allowances for more details.

What are the tax changes?

Online platforms, including websites for third-party sellers and those covering the sale of goods and services, such as handmade or second-hand clothes, such as eBay, Etsy, Vinted or renting your driveway, short-term lets etc. now have to provide your sales income data to HMRC.

The HMRC signed up to the Organisation for Economic Co-operation and Development (OECD) rules, which will allow it to investigate the tax affairs of people earning an income via a company that operates abroad. It could already request this information from UK-based digital platforms. It does not affect the current rules for individuals for individuals and businesses. Platforms must give the HMRC this information from the end of January 2024.

I sell my own clothes but I’m not a business – How does this affect me?

There are no changes to this situation. If you are disposing of your own personal belongings, you can sell as much as you like without paying any tax. The same rules apply whether you are selling online or at a car boot sale, for example, as long as you are not buying goods specifically to resell them.

I make more than £1,000 a year selling my family’s belongings – Should I be worried?

If you are concerned that it may look like you are running a business, keep receipts and photos when you buy products you might decide to sell in future.

I sell more than 30 items a year what are the tax rules?

This remains the same as per earning £1,000 in sales a year. You just need to register with HMRC for Self Assessment  if your sales exceed £1,000. Keep all your evidence.

I have just started a business – How am I affected?

The tax year runs from 6 April to 5 April of the next year and income during that tax year must be reported by to HMRC by 31 January of the year after that.

If you earn more than £1,000 a year from your side hustle, the HMRC considers you to be a “trader”. Your side hustle counts as a “self-employment” business.

You will need to register this business with the HMRC. The deadline for this is 5 October following the end of the tax year in which you started the self-employed activity.

I have a side hustle and make more than a £1,000 a year – How does this affect me?

Again, there are no changes to this rule. In that, if you make more than £1,000 a year from this activity, you must register with HMRC. This does not necessarily mean that you will pay additional tax.

You will, of course, have your personal allowance. But you must register and fill in a self-assessment form.

See this HMRC page for more advice: Check if you need to send a Self Assessment tax return

I rent out my driveway – Do I need to pay tax on this?

This does count as a business and so if it gives you more than £1,000 profit per year (after allowable expenses) you will need to abide by the rules shown above.

I rent out a room – Do I need to pay tax on this?

You can earn up to £7,500 a year tax free (halved to £3,750 if you share the income with your partner or someone else) renting out a furnished room through the government’s Rent a Room scheme. This can also apply to Airbnb or booking.com landlords.

The tax exemption is automatic if you earn less than the threshold, so you don’t need to do anything if you earn less than the £7,500.

But if you earn more than the threshold, you are required to complete a self-assessment tax form.

I have a main employment and a side hustle – Will I have to pay additional tax?

The tax on your main employment will be paid through Pay As You Earn (PAYE). You will need to fill out a self-assessment form if you earn more than £1000 from a side hustle (not selling your own personal items). The tax office will use all the information to work out how much (if any) additional tax you have to pay.

What about my historic income?

Mahmood Reza, of I Hate Numbers – a Business Finance Fixer, Tax Advisor and Author of the book I Hate Numbers* – says that HMRC will wait until 25 January 2025 for 2023-2024 tax returns to be filed to check what has been disclosed.  If your income is from a trading activity and over a £1,000 it must be declared. He comments:

If you have historic income that you have not reported, that is classified as trading income and over £1,000 then you have two options: Ignore it or act by making a voluntary declaration to HMRC.

Option One is ignoring your obligations and hoping you are not found out.  This is called tax evasion, is illegal, high risk and stressful. If HMRC find out then consequences, such as tax penalties, will be harsher than coming forward.

Option Two, a voluntary declaration is where you inform HMRC and get your tax affairs up to date.  This puts you in control of the situation, mitigates any potential tax penalties that may be imposed, and in my experience gives you peace of mind.”

See Mahmood’s video here for more information:

I’m not sure if I should pay tax – What should I do?

See the Government website Check if you need to tell HMRC about additional income.

If you have no other income, see the Government’s tool Budget for your Self Assessment tax bill if you’re self-employed to estimate your likely weekly or monthly profit to get an idea of how much Income Tax, Class 2 and Class 4 National Insurance contributions you must pay.

See also Paying taxes on your side hustle

Images from From pastime to fulltime – How to turn a hobby into a job

*Amazon affiliate link