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Understanding Tax Implications of a Side Hustle
Starting a side hustle can be an exciting way to earn extra income while maintaining full-time employment. However, it’s important to understand the tax implications that come with this additional source of revenue. Whether you’re freelancing, selling online, or running a small business, there are several key considerations to keep in mind.
What is a Side Hustle?
A side hustle refers to any activity that generates income outside of your primary job. It could be a hobby, a part-time business, or any other venture that contributes to your overall earnings. While it’s a great way to supplement your income, it also comes with specific responsibilities, particularly when it comes to taxes.
Registering as Self-Employed
If your side hustle earns more than £1,000 in a tax year (before expenses), you’ll need to register as self-employed with HMRC. This threshold is known as the trading allowance, and income below this amount is typically tax-free. However, once you exceed this limit, even slightly, you must report the income.
You can register online via HMRC’s website, and it’s generally required to do so by October 5 following the end of the tax year in which you started trading. Once registered, you’ll need to submit a tax return each year, detailing all sources of income and your self-employment earnings and expenses.
Filing Tax Returns
The deadline to file your tax return and pay any outstanding taxes is January 31 following the end of the tax year. This process helps determine how much tax and National Insurance you owe based on your total income.
In the future, the government plans to introduce a simplified online reporting system starting from the 2027/28 tax year. This will benefit those earning between £1,000 and £3,000 from self-employment, though details are still pending.
National Insurance Contributions
Depending on your profits, you may also need to pay Class 4 National Insurance. For the 2025/26 tax year, this only applies if your profits exceed £12,570. Initially, this might not be a concern, but it’s something to monitor as your side hustle grows.
Claiming Business Expenses
One advantage of self-employment is the ability to claim allowable business expenses, which can reduce your taxable profit. These expenses might include software subscriptions, business travel, or a portion of your phone or internet costs. Keeping accurate records is essential—consider using accounting software or a simple spreadsheet to track your expenses and retain receipts for any deductions.
VAT Registration
If your turnover exceeds the VAT threshold (currently £90,000), you’ll need to register for VAT. Additionally, it’s important to be aware of Making Tax Digital (MTD). From April 2026, self-employed individuals earning over £50,000 will need to maintain digital records and submit quarterly updates using compatible software. This threshold will decrease to £30,000 in 2027 and £20,000 in 2028.
Impact on Overall Income
Your side hustle profits will be added to your total annual income, including your salary. If you’re a basic rate taxpayer, your side income will typically be taxed at 20%. However, if your total income crosses into the higher or additional rate tax bands, some of your profits could be taxed at 40% or 45%.
Final Thoughts
Starting a side hustle can be both rewarding and challenging. It’s crucial to stay informed about your tax responsibilities from the beginning. If you’re unsure about any aspect of your tax obligations, consulting a tax advisor or accountant can provide valuable guidance. Early professional advice can save you time, stress, and help you focus on growing your business.
