Have you got a small side hustle and worried about the tax implications? Are you worried if you should be declaring it and paying tax? Thinking if you need to notify anyone or submit a tax return? Depending on the size of the side hustle, you might not even have to pay any tax.
But maybe you started that side hustle to make a little pocket money for the short term and wanted to make it a regular income growing each month or year. Or what started as a small side hustle has grown so big you’ve had to give up the day job. If that’s the case, firstly congratulations.
Either way, below we explain what you can earn tax free and when you need to register as you grow.
I’ve got a side hustle. Do I need to pay tax?
The good news is there are two tax free allowances which mean you don’t necessarily have to pay tax on the little extra money you’ve earnt.
Trading allowance
The trading allowance is a tax exemption of up to £1,000 a year for individuals with trading income from:
- self-employment
- casual services, for example, babysitting or gardening
- hiring personal equipment, for example, power tools
If your annual gross income from these is £1,000 or less, you do not need to tell HMRC.
This allowance does not apply to trading income from a partnership.
Property allowance
The property allowance is a tax exemption of up to £1,000 a year for individuals with income from land or property.
If you own a property jointly with others, you’re each eligible for the £1,000 allowance against your share of the gross rental income.
If your annual gross property income is £1,000 or less, you will not need to tell HMRC, unless you cannot use the allowances. If it’s higher, you’ll need to declare your property income. If that happens, don’t delay it and call us on 0114 4000192 to discuss your tax obligations.
You cannot use this allowance on income from letting a room in your own home under the Rent a Room Scheme.
Rent a Room Scheme
Alternatively, if you rent out a room in your house, then you may qualify for Rent a Room relief. Here you can earn up to £7,500 of rental income free from tax, provided you meet certain conditions.
The income limit will generally include everything you are charging your tenants and you won’t be able to deduct any related expenses from your rental income. You don’t need to do anything except keep a record of your income.
For a detailed personal discussion based on your individual circumstances, call Lexicon Tax on 0114 4000192 for a friendly chat.
When should you register as a sole trader?
Even if you have a side hustle income while also working a full-time job you might need to register as a sole trader if your income exceeds £1,000 in a tax year. Do this if the following applies:
- You earned over £1,000 from self-employment in the previous tax year.
- You need to prove you’re self-employed, to claim tax-free childcare or similar.
- You want to make voluntary class 2 National Insurance contributions to qualify for benefits.
- If you’ve already made the decision to go self-employed and want to work as a sole trader, then you should register sooner rather than later.
Who can work as a sole trader?
Anyone and everyone, which is why there are millions of sole traders in the UK today. Some popular sole trader examples include:
- Freelancers (designers, copywriters, marketeers, photographers and social media consultants)
- Self-employed tradespeople (builders, plumbers, electricians, gardeners and carpenters)
- Gig economy workers (couriers, taxi drivers, delivery drivers, tutors and nannies)
Am I self-employed or a sole trader?
Confused if you’re a sole trader or self-employed? No need to worry, it’s easily cleared up. Technically, as a sole trader you are self-employed, because you work for yourself. So put simply, you fall into both categories.
How do you start working as a sole trader?
It’s simple. You need to register for the Self-Assessment tax return and class 2 National Insurance by 5th October in your second year of business, at the latest. You could be fined if you don’t, so it’s worth doing this sooner, not later. If you’re confused and would like an expert to take care of this on your behalf, don’t hesitate to get in touch with us. We’ll take care of getting you registered, advising on how to keep your records and bookkeeping tips. We will not only ensure to get your tax return in on time but also save you tax by using our extensive knowledge on tax efficiency savings.
Call Lexicon Tax on 0114 4000192 to get you started.
DISCLAIMER
The above is provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Lexicon Tax Ltd t/a Lexicon Taxi cannot be held responsible for the consequences of any action or the consequences of deciding not to act.
