UK side hustle taxes – What you need to know

UK side hustle taxes – What you need to know

For this post of UK side hustle taxes I have handed over to Jack from Making Tax Simple.

Jack is an ATT qualified tax adviser aiming to help make tax simple for people of all ages and incomes. He started working in tax over 2 years ago and has been gaining knowledge of the subject through training, exams and practical experience.

Now he is giving back by helping people understand and save money on their taxes. His aim is to ensure everyone can learn how taxes work and the allowances they can claim. You can take a look at his Twitter, YouTube channel and his Personal Tax Masterclass.

Since the first lockdown there has been a significant increase in the number of people starting UK side hustles. Some even think a side hustle is a necessity these days.

As with most forms of additional income or gains, HMRC are going to want you to pay tax on your profits. Thankfully, there are many tax considerations we can make to minimise the impact.

This article will look at the considerations you should make on your UK side hustle taxes.

The taxes on UK side hustles

A side hustle is treated as a self employed job, which means you may be liable to income tax and national insurance.

Depending on your income tax bracket, you will pay either 20%, 40% or 45% on your income. For national insurance, you will be charged 9% on profits from £9,569 and £50,270 (2% in excess of this) and £3.05 per week.

There is an order in which your income is taxed. Non savings income which includes employment income, side hustle profits and property income, is taxed first.

Therefore, these will attract the lowest tax brackets. Your other income – like savings and dividends – are taxed after non savings income.

Your non savings income will receive the personal allowance to give you the highest savings.

If you earn less than £12,570 in your main job, then your personal allowance can also be used against your side hustle profits.

The basic calculation

You will have to undertake the calculation of side hustle profits.

In the self assessment tax return, the calculation is simply a breakdown of income and expenses which you input into the return. You don’t have to submit breakdowns of these amounts to HMRC unless they enquire into your return.

Similarly, you don’t have to submit a profit and loss account unless requested. However, you must keep these on file for 6 tax years after the tax return.

While the calculation of income is fairly simple, identifying expenses is harder.

Only expenses relating 100% to the business can be deducted. Therefore, any expenditure which is also used personally needs to be assessed.

For example, if you work from home for some of your UK side hustle, the energy and electric expense cannot be claimed in full.

For most side hustlers (earning less than £150,000 in the tax year), you will be working on the cash basis so income and expenses are taxable at the point actually paid or incurred. This method of accounting also gives you entitlement to use simplification methods.

Simplification methods include a flat rate amount for the personal use of your home and business use of your vehicle which can help to reduce the admin of the tracking of expenses.

With these simplification methods, there are a variety of conditions that need to be met in order to claim the allowances.

The allowances

While the large majority of the tax reductions you will get relate to expenses that you have incurred on the business, the main allowance that can be claimed relates to low income or low expense side hustles.

This allowance is the trading allowance.

This is a £1,000 allowance which can be claimed instead of the relevant allowable expenses. This reduces the tax due by £1,000.

This can lead to a few different situations.

Expenses of less than £1,000

Most UK side hustlers are likely to have expenses of less than £1,000.

If your total expenses are less than £1,000 then it will likely make sense for you to claim the trading allowance instead.

You can use this allowance to save up to £450 in tax.         

Income less than £1,000    

If your income is less than £1,000 in the tax year, you won’t have to pay tax on this income.

The trading allowance will automatically apply to this income. You will not have to file a self assessment tax return if your income is less than £1,000.

However, you cannot create a loss using this allowance. For example, if you earned £500 in the tax year, your trading allowance would be £500 to reduce the taxable income to £0 for the year.

Expenses over £1,000

If your expenses are over £1,000, it will probably make sense to claim the expenses rather than the trading allowance. This will likely reduce your taxable profits the most.

Is a limited company worth it?

There’s a debate about whether it’s better to have a limited company or act as a sole trader. There are a variety of different factors to consider and it will depend on your personal circumstances.

The key considerations

With a limited company there are two levels of tax.

The first is corporation tax and the second is tax on dividends. This is different to the income tax and national insurance on sole trade profits.

With a limited company you have more control over how much of your income is taxed. This is because you can select how much you want in dividends.

There is more admin and filing requirements with limited companies, including the requirement to complete annual filings of profit and loss accounts and balance sheets. This may increase expenses as you may have to pay for an accountant. 

A limited company does provide limited liability from any debts. This means your personal property is safer compared to when you are working as a sole trader.

As a sole trader, you can use the cash basis which also enables you to use the simplification methods. This is much simpler to account for than the accruals basis, limited companies have to use.

The good news is you do not have to decide now. You can convert from a sole trader to a limited company at any time.

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