Are you lying awake at night worried the tax-man is lurking around the corner because you should register your side hustle as a business? Well, worry no more! In this guide, I’ll show you the rules you need to know around registering as a business, what it means for your taxes, tax code and what you need to do next.
Updated 3 November 2021
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Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
1. When Do You Need to Register a Business?
You need to register as a business when the income from your side hustle goes over £1,000 during one tax year. Below £1,000, you can choose to take advantage of the trading income allowance. This is where UK individuals can earn up to this amount without letting HMRC know. It’s important to note that £1,000 relates to income, not profit and that it isn’t always tax-efficient to use. Therefore, you should check whether using the trading allowance is right for you or if you should register with HMRC regardless of your turnover.
2. How to Register a Business with HMRC
Once your side hustle business crosses the £1,000 income threshold during a tax year, it’s time to register your business with HMRC. This means registering as self employed. You can do this online yourself by filling in the form on the HMRC website. I’ve put together a guide to registering as self employed where I show you the form you need to use and the five steps you need to take to complete your registration.
There are other business structures available, such as a Limited Company. And, you may need to consider these depending on your intentions with your side hustle. Alternatively, whether you have business partners. If you do decide you want to form a Limited Company, then you’ll need to do that straight away. Ideally, you should do this before you started working on your side hustle. This is because you’ll need to send out invoices and open a business bank account in the name of your LTD. You can only do this legally once you have registered.
If you are registering your side hustle as a business, then read my full guide to Setting Up a Business. Here, I share more of my knowledge on topics such as business registration, business structures and invoicing to help you set up correctly.
3. What Happens Once You Are Registered as a Business
Once you have successfully registered as self-employed, you’ll receive a UTR number to make things official. You’ll then need to follow the rules of self-assessment. This includes keeping business records, working out your own taxes and filling in a tax return (also referred to by HMRC as an SA100 form) online by 31 January each year. It’ll help to update your diary with all the tax year dates so you can stay on top of your deadlines. This process of reporting and paying tax is referred to as self assessment.
4. What Tax Do You Pay On Your UK Side Hustle?
When you have registered your side hustle as a business with HMRC, you’ll need to pay the following self-employment taxes on your business profits:
- Income tax
- Class 2 National Insurance
- Class 4 National Insurance
If you are employed, then the amount of income tax you pay will be based on your combined income from your side hustle and employed job. I’ve written a separate guide about tax when you’re employed and self-employed where I go into more detail about how tax works when you have more than one source of taxable income and what you need to look out for on your payslip.
- How to Set Up a Business in the UK
- How to Register as Self Employed with HMRC
- Do I Need to Do a Tax Return If I Earn Under £10,000?
- Tax Year Dates 2021
- Self-Employed Tax & National Insurance Explained
- Opening a Separate Business Bank Account If You’re Self-Employed
Taxes are changing! From April 2024 sole traders will need to report their earnings and pay tax on a quarterly basis. This is known as Making Tax Digital, which you can read more about in this guide to help you get prepared.