Tax on your side hustle income
Do I need to pay tax on my side hustle? With HMRC extending its tax-grabbing tentacles, it’s essential to know when you need to pay tax on your side hustle income. You may need to pay tax on your side hustle if your combined taxable income exceeds the annual tax-free personal allowance of £12,570. For most people, taxable income consists of their salary, side hustle or self-employment income, plus income from savings and investments.
Tax-exempt side hustle income
The good news is that up to £1,000 of side hustle income is tax-exempt. The UK tax system includes a tax-free trading allowance, which allows individuals to earn £1,000 tax-free annually from self-employment. The £1,000 allowance applies to gross income or sales. If your side hustle income is £1,000 or less, you don’t need to complete a tax return or pay tax.
If your combined taxable income is less than £12,570 annually, income from a side hustle is tax-free. This is because it falls within the tax-free Personal Allowance of £12,570 (or tax code of 1257L). We’ll illustrate this further using some examples.
Example 1
Isabella earns £30,000 per year from her employment and generates £1,200 in sales from selling handmade jewellery. Isabella’s combined income exceeds the Personal Allowance of £12,570. Her salary is taxed at source by her employer after deducting the personal allowance. The employer calculates and deducts tax and national insurance from her salary. The trading allowance of £1,000 is deducted from the sales figure of £1,200, leaving £200 of taxable side hustle income. This is taxed at 20%, which means £40 in tax is owed to HMRC.
Example 2
James is semi-retired and works part-time, earning £9,500 a year. He is a keen woodworker and sells his projects online, making £2,000 in sales this year. James’ total income for the year is £11,500. This is below the personal allowance of £12,570, so none of his income is taxable.
After deducting James’ part-time salary from his personal allowance, James has a further £3,070 that he can earn tax-free. This means James can earn up to £4,070 in sales from his side hustle before he needs to pay tax. After deducting the trading allowance, James’s side hustle income for tax is £3,070. As this is covered by the remaining balance of the personal allowance, it is tax-free.
Deducting the £1,000 trading allowance or business expenses?
Self-employed individuals can deduct either the £1,000 allowance from their trade income or deduct allowable business expenses, but not both. If your trading income exceeds £1,000 and your business expenses are less than £1,000, then it is more tax-efficient to deduct the trading allowance. If your business expenses exceed £1,000, deducting expenses from gross income results in a lower tax liability.
Examples of deducting the trading allowance versus deducting business expenses:
| Gross income | Business expenses | Trading allowance | Taxable income | Tax at 20% |
|---|---|---|---|---|
| £4,000 | £500 | £3,500 | £700 | |
| £4,000 | £1,000 | £3,000 | £600 | |
| £2,000 | £1,200 | £800 | £160 | |
| £2,000 | £1,000 | £1,000 | £200 |
The examples illustrate that it is more tax-efficient to deduct business expenses when they exceed the £1,000 trading allowance.
Online platform and bank fees
If you are selling your side hustle products online, you must track the correct sales figures for tax reporting. If you are selling via an online platform that takes a commission or selling fee, these amounts must be added back to the actual cash value that you receive. The same applies to any bank fees that are deducted from the selling price. These fees are business expenses and should not be deducted from the selling price when determining your turnover figure for tax purposes.
The £1,000 trading allowance is based on your gross turnover or sales, not the amount you receive net from online sales. For example, if you sell an item for £5 and you receive £4.50 after the various fees are deducted, your gross sales figure for HMRC reporting is £5.00, not £4.50.
An example of online selling fees and the trading allowance
As an example, if you sell 100 items priced at £10.50 each and physically receive £10 per sale in your bank account from the online sales platform, you will receive £1,000 in your bank account. It is incorrect to assume that you do not have to submit a tax return and can claim the trading allowance against the £1,000 you have received. Your actual turnover is £1,050 and your business expenses are £50. In this instance, you will need to submit a tax return declaring income of £1,050 and claim the trading allowance against this, reducing your taxable income to £50. You will pay tax on the remaining income of £50, which is £10 for basic rate taxpayers.
How can we help?
In our shop, we have an Excel spreadsheet that tracks side hustle sales, fees, expenses and estimates the potential tax liability. The spreadsheet also takes into account employment and other income in the tax estimates and calculates the tax liability when claiming the trading allowance or deducting business expenses.
Other resources:
To learn more about the trading allowance and whether you need to submit a tax return to HMRC, use the resources in the links below:
Check if you need to tell HMRC about your income from online platforms – GOV.UK
Love your side hustle? Make it tax official this Valentine’s – GOV.UK
Side hustles and tax in the UK: The £1,000 rule – Times Money Mentor
HMRC is clamping down on ‘side hustles’ – what tax do you need to pay? – Which?
