The world of work in the UK has changed dramatically. Alongside their primary employment, millions of Britons are now embracing the flexibility and financial potential of a side hustle. From selling handmade crafts online to freelance writing, tutoring, or driving for a ride-sharing service, these ventures offer a path to extra income, skill development, and a taste of entrepreneurship.
The excitement of starting a side hustle can often overshadow the less thrilling, but equally important, matter of tax. For many, the UK tax system can seem like a daunting and complex maze. However, understanding your obligations is not only a legal necessity but a fundamental part of running a successful business. Ignoring tax rules can lead to fines and stress, while getting it right from the beginning ensures you can grow your venture with confidence.
This guide is designed to demystify the UK tax system for anyone with a side hustle. We'll break down the key concepts, deadlines, and rules in a simple, easy-to-understand format so you can focus on what you do best—making your business thrive.
Before we dive into the details, it's crucial to understand what the government (HMRC) considers a business or "trade" for tax purposes. This is the first question you need to ask yourself.
A Business/Trade: This is when you are regularly selling goods or services with the intention of making a profit. You might have repeat customers, a structured approach to your work, and are actively marketing your service. For example, a web designer who takes on freelance projects every month is running a business.
A Hobby: This is an activity you do for pleasure, where any money you make is a happy bonus, but not the primary goal. You are not actively trying to make a profit, and the work is infrequent. For example, selling a few old items on an online marketplace or receiving a small sum for a one-off favour for a friend would likely be considered a hobby.
HMRC looks at several factors to determine if your activity is a business, but the key indicator is the intention to make a profit and the regularity of your activities. If you are consistently earning money from your side hustle, you should assume it's a business and follow the tax rules.
This is one of the most beneficial rules for new side hustlers. HMRC introduced the £1,000 trading allowance to make it easier for people with small-scale side hustles to get started without complex paperwork.
The allowance means you can earn up to £1,000 in gross income from your side hustle each tax year without having to pay any tax on it or even tell HMRC about it.
It's important to remember a few key things about this allowance:
Gross Income: This is your total revenue before any expenses are taken off.
The Tax Year: The UK tax year runs from 6 April to 5 April the following year.
Sole Trader: This allowance applies to sole traders, which is how most side hustles begin. A sole trader is an individual who is the sole owner and operator of their business.
If your gross income is below £1,000, you don't need to do anything. You don't have to register for Self-Assessment or file a tax return for that income.
If your gross income is above £1,000, you have two options:
Use the Allowance instead of Expenses: You can simply deduct the £1,000 allowance from your gross income. If your income was £1,500, your taxable profit would be £500. This is a great, simple option if your business expenses are low.
Deduct Allowable Expenses: Alternatively, you can choose to ignore the £1,000 allowance and deduct your actual business expenses instead. This is often a better choice if your expenses are more than £1,000. You'll need to keep detailed records for this.
If your side hustle income is over the £1,000 trading allowance, you are legally required to register as a sole trader with HMRC and complete an annual Self-Assessment tax return.
When to Register: The deadline to register for Self-Assessment is 5 October following the end of the tax year in which you started your business.
For example, if you started your side hustle in the tax year ending 5 April 2025, you must register by 5 October 2025.
How to Register: You can register online on the UK government's website (gov.uk). You will need your National Insurance number and details about your business. HMRC will then send you a Unique Taxpayer Reference (UTR) number, which you will need for your tax returns.
It is absolutely crucial to register on time. Missing this deadline can result in a penalty from HMRC, even if you don't owe any tax.
Good record-keeping is the backbone of a stress-free tax experience. Even if you're not a fan of spreadsheets, it's essential to keep a clear paper trail. This documentation will be your evidence for the figures you report to HMRC.
What to keep:
All records of sales and income.
All receipts and invoices for business expenses.
Bank statements showing business-related transactions.
A mileage log if you use your personal vehicle for work.
How long to keep them: HMRC requires you to keep your records for at least 5 years after the tax return deadline for the tax year they relate to. For example, for the tax year 2024-2025, you would need to keep your records until at least 31 January 2031.
You can use simple spreadsheets, accounting software, or even a shoebox for receipts—as long as it’s organised and you can access it easily.
This is the most important part of the process. Your tax bill is based on your taxable profit, not your total income.
Step 1: Calculate Your Taxable Profit
Total Income (all money received from your side hustle).
Minus Allowable Expenses (all costs of running the business, which we'll cover next).
Equals Taxable Profit.
Step 2: Understand the Taxes You'll Pay As a sole trader, you will typically be liable for two main types of tax on your profits:
Income Tax: This is based on your total income from all sources (your main job and your side hustle). Your taxable profit is added to your primary salary, and you pay tax on the total amount at your marginal tax rate (e.g., 20%, 40%, etc.).
National Insurance Contributions (NICs): These are contributions towards state benefits and the state pension. As a sole trader, you pay two types of NICs:
Class 2 NICs: A flat weekly rate for profits above a certain threshold (currently around £6,725 per year).
Class 4 NICs: A percentage of your profits above a certain threshold.
Step 3: Filing Your Tax Return and Paying the Bill The entire process happens via your Self-Assessment tax return.
Deadline for Filing: You must file your online tax return by 31 January following the end of the tax year.
Deadline for Payment: Your tax bill is also due on 31 January.
It's a good idea to put aside a percentage of your side hustle earnings throughout the year to cover your tax bill when the deadline approaches.
This is the part that helps reduce your tax bill. An allowable expense is a cost that is incurred "wholly and exclusively" for the purpose of your trade. This is a crucial phrase to remember.
Common examples of allowable expenses for a side hustle:
Equipment: Laptops, cameras, tools, software, etc. (You can often claim the cost over several years).
Home Office Costs: If you work from home, you can claim a portion of your rent, electricity, heating, or broadband. You can either use a simplified flat rate or calculate a percentage of your bills.
Travel Costs: Fuel for work-related trips (not your daily commute), train tickets, parking fees.
Marketing and Advertising: Website costs, business cards, social media advertising.
Training: Courses directly related to improving your business skills (e.g., a course on digital marketing).
Bank Charges: Fees for a business bank account.
Keep in mind that you can't claim for anything that has a personal element to it. For example, you can’t claim for a new phone if you use it for both personal calls and business. You would need to split the cost fairly.
While many side hustlers can handle their tax affairs themselves, there are times when it’s wise to seek professional help from an accountant.
Consider an accountant if:
Your side hustle income is substantial (e.g., over £30,000).
Your business is complex, involving different types of income or international clients.
You are unsure about what expenses you can claim or how to file your return.
You simply want to focus on your business and have an expert handle the paperwork for you.
An accountant can save you time, ensure you're claiming all eligible expenses, and provide peace of mind.
Starting a side hustle is an exciting and empowering journey. The UK tax system, while it may seem complex, is manageable with a bit of knowledge and planning. By understanding the £1,000 trading allowance, keeping meticulous records, and being aware of key deadlines, you can navigate your tax obligations with confidence.
Don't let the thought of tax deter you from pursuing your entrepreneurial dreams. Take the time to understand the rules, and you'll be well-equipped to grow your side hustle into a thriving business.
Ready to start your journey? Check out the job opportunities and skills-based courses on MyJobsi.co.uk to find your perfect launchpad.
