Mastering Taxes for Your UK Side Hustle: A Guide for Freelancers and Entrepreneurs

Running a side hustle or freelancing part-time can be an empowering way to boost your income, pursue your passions, or test the waters of entrepreneurship. From selling handmade crafts online to tutoring, side hustles have become a staple of modern life in the UK. But with every additional income stream comes one unavoidable truth—tax obligations.

Navigating tax laws might seem like a daunting task, especially if you're new to managing multiple earnings. Don't worry, though—we've created this comprehensive guide to help you better understand your tax responsibilities, ensure compliance with HMRC, and even save money along the way.

Understanding Side Hustles and Taxable Income

What Counts as a Side Hustle?

A side hustle refers to any income-generating activity outside of your main job or business. Here are some common examples:

• Selling products on platforms like eBay, Amazon, or Vinted (including handmade goods or second-hand items).
• Freelance services such as writing, graphic design, tutoring, or photography.
• Renting out property, vehicles, or equipment (e.g., on Airbnb or Turo).

Essentially, if you're earning money outside of your main job, HMRC considers it taxable income, and you'll need to evaluate whether you're operating as a hobby or a business.

Taxable vs Non-Taxable Income

A quick distinction:

• Non-Taxable Income: If you're occasionally selling items, like decluttering your home and listing a few things on eBay, you're not running a business and those sales are not taxable.
• Taxable Income: If you're regularly earning money from your activities, HMRC might classify it as a business. For example, if you're creating and selling handmade jewellery consistently, your income qualifies as taxable.

The key is the Trading Allowance:

• You won’t need to report your income to HMRC if it’s less than £1,000 annually from self-employment or casual sales. However, exceeding this threshold means you'll need to account for your earnings.

Do You Need to Register with HMRC?

If your income from your side hustle exceeds the £1,000 trading allowance, HMRC requires you to register as self-employed and submit a Self Assessment tax return. Here's what you need to do:

When Should You Register?

The deadline to register is 5th October after the end of the tax year in which you started earning over £1,000.

How to Register in 3 Simple Steps:

1. Create a Government Gateway Account:

• Visit HMRC’s website and register for an account.

1. Obtain Your Unique Taxpayer Reference (UTR):

• Once registered, HMRC will send you your UTR—a 10-digit number essential for filing tax returns.

1. Complete Your Self Employment Registration:

• Provide details of your side hustle and business activities.

Record-Keeping for Your Side Hustle

Accurate record-keeping isn’t just a good habit—it’s essential for compliance and maximising your deductions.

What to Track

• Income: Keep records of all sales and payments received. For instance, track your eBay sales and associated PayPal payments.
• Expenses: Record every business expense, such as platform fees, shipping costs, or materials purchased.
• Mileage (if applicable): If you use your vehicle for business tasks, such as delivering goods, log your journeys.

Tools to Simplify Your Life

• Accounting Software: Options like QuickBooks or Xero can automate tracking for income and expenses.
• Spreadsheets: A simple Excel or Google Sheets document can work, provided you keep it up-to-date.

Deductions and Allowances to Save on Tax

Claiming deductions is a great way to lower your taxable income. Here’s what you can include:

Common Deductible Expenses

• Office Supplies: Pens, notebooks, and similar items.
• Software Subscriptions: Tools like Canva Pro or Grammarly for freelance creatives.
• Internet and Utilities (home-office use): A proportionate amount based on your work usage.

Mileage and Travel Costs

For side hustles involving driving (e.g., deliveries), you can claim:

• 45p per mile on the first 10,000 miles driven annually.
• 25p per mile after 10,000 miles.

Home Office Deduction

• Flat-Rate Method: A simple option involving claiming a fixed amount based on your working hours.
• Actual Costs: Calculate the proportion of household bills used exclusively for work, such as electricity and heating.

Filing Your Self-Assessment Tax Return

Filing a Self Assessment tax return is a key part of managing a side hustle. Make sure you meet these deadlines:

• 31st January: This is the final deadline for submitting your tax return online for the previous tax year. It applies to all individuals and businesses required to report income, gains, or other relevant financial details to HMRC. Missing this deadline could result in penalties, so ensure you’ve gathered all necessary documents and completed the process well in advance.
• 31st October: For those who prefer submitting a paper tax return, this is your last chance to do so for the previous tax year. Remember to account for postal delays and ensure your return reaches HMRC by this date to avoid late submission penalties. It’s a good idea to send it earlier to avoid any last-minute stress.

VAT and Your Side Hustle

When Do You Need to Register for VAT?

You must register for VAT if your earnings reach £90,000 per year. For most side hustlers, this won't apply, but it's worth noting if your business scales rapidly.

Voluntary VAT Registration

Businesses earning less than £90,000 may register voluntarily to claim VAT back on expenses. This is particularly useful if your side hustle entails significant costs.

Penalties for Non-Compliance

Failing to comply with HMRC regulations can lead to:

• Penalties for late filing or non-payment can quickly accumulate, potentially costing businesses hundreds or even thousands of dollars depending on the duration of the delay. It’s crucial to meet deadlines to avoid these extra costs.
• Additional fines for incorrect figures on your returns may apply if errors are detected, even if they are unintentional. These fines can vary based on the severity of the mistake and can lead to further scrutiny from tax authorities.

Common Mistakes to Avoid

• Ignoring the £1,000 trading threshold, which could lead to unexpected tax liabilities if your trading income exceeds this amount.
• Forgetting key submission deadlines, risking penalties and fines for missing important tax return or payment dates.
• Failing to keep accurate records, making it harder to track income and expenses, and potentially leading to errors in your tax filings.

Why You Need a Reliable Accountant

While handling your side hustle taxes is possible solo, it can become overwhelming as your income grows. A good accountant can:

• Ensure full compliance with HMRC requirements.
• Help you maximise deductions and allowances.
• Save you time and stress, so you can focus on growing your side hustle.

At Virtue Accountants, we’ve helped countless freelancers and small business owners simplify their tax process. From bookkeeping to VAT compliance and personalised tax advice, we’ve got you covered.

Take Control of Your Side Hustle Taxes Today

Managing taxes for your side hustle doesn’t have to be intimidating. By staying on top of your income, keeping detailed records, and maximising deductions, you’ll not only stay compliant but also save money in the process.

Still feeling unsure? Contact Virtue Accountants today for a free consultation, and we’ll help you turn your side hustle into a smooth-running business.

Speak to an Expert