Do I Need to Register my Side Hustle as a Business with HMRC? Having a side hustle can be hard enough without having to worry whether you are doing something wrong in HMRC’s eyes. Here’s some advice to help you assess your own situation and decide what the most appropriate next steps are for you to take next.
Starting a side hustle when you are employed in a job is a great way to earn some extra cash or start building up your business.
But anyone with a side hustle will tell you there is a lot to do and a lot to learning, including the dreaded topic of taxes.
I often meet people who are in this situation and this is the advice I give them to help them figure out what they need to do.
How Tax Works When You Are Employed
If having a side hustle is new to you it is not at all surprising that you are confused by the subject of taxes.
When you are employed, your employer handles all your tax for you. They are responsible for working out how much tax and national insurance you need to pay as well as deducting it from your pay.
Anyone who is employed pays:
- Income tax and;
- Class 1 National Insurance.
The amount of each of these you pay depends on how much you earn over and above the tax free thesholds.
How Tax Works When You Are Self-Employed
When you have a side hustle you are basically self-employed. That means the money you get paid from your clients has no tax deducted from it.
Anyone who is self-employed must pay:
- Income tax;
- Class 2 national insurance;
- Class 4 national insurance.
The amount of income tax you pay will be based on your gross earnings from your employment and profits (income minus expenses) of your side hustle.
The amount of Class 2 and Class 4 national insurance you pay is based on how much profit you make from your side hustle.
Crucially it is also your responsibility to tell HMRC about your untaxed earnings and work out the tax you need to pay on it (like your employer does for you!).
What about the £1,000 Trading Allowance?
HMRC introduced the £1,000 Trading Allowance back in 2015 to simplify to the tax system for individuals.
But to be honest it has been the source of some confusion, especially for people with a side hustle.
The £1,000 trading allowance means that if your side hustle earns you an income of less than £1,000, then you don’t need to tell HMRC about it or let them know.
Remember this is income not profit.
It sounds great.
Let’s say you get paid £900 in your side hustle and pay income tax at 20%. If you declare these earnings to HMRC you’ll need to pay income tax of £180 (you’ll be below the thresholds so won’t need to pay Class 2 and Class 4 national insurance).
Not only that you’ll need to go through the hassle and cost of sending in a tax return.
But is using the £1,000 Trading Allowance always the right thing to do?
There are some circumstances that mean you may actually be better off telling HMRC about your side hustle.
Losses are perfectly normal and all part of being in business, especially in the first year when you need to buy equipment to get your side hustle up and running.
By completing a tax return you’ll be able to legally record your trading loss and use it to save you tax or even generate a tax repayment.
You cannot use the £1,000 trading allowance and claim to use trading losses. It is an either/or decision.
Here’s the 2 main ways trading losses can be used:
1. Carry Forward Your Trading Loss
Claiming a trading loss means that in future years when your side hustle makes a profit you will save tax at your highest rate of tax.
Let’s say you pay tax at 20% and these are your business profits for the first 3 years of your side hustle:
In 2018/2019 you complete a tax return to record your trading loss of £2,000.
In 2019/2020 you make a profit in your business but you use your trading loss to reduce your profits for tax purposes, so you’ll pay tax on £3,000 of £600.
That’s a tax saving of £400. Which you would have lost out on by choosing to use the £1,000 trading allowance to avoid completing a tax return.
In 2020/2021 your trading losses have all been used up. That means you’ll pay tax at 20% on the full amount of your business profits, that’s £1,400.
2. Sideways Relief
If you make a trading loss are employed and self-employed you can claim Sideways Relief which may generate a tax repayment.
This basically means that you can set off your business loss against your employment earnings, generating a tax repayment.
Again you must submit a tax return to claim this relief. Read more about Sideways Relief here.
HMRC’s Recommended Approach
It is worth noting that although the £1,000 Trading Allowance can be used, HMRC’s own recommended approach is that you should register your side hustle as a business, regardless of turnover.
That is because in their view they consider you are in business, albeit making a minimal amount of money but you should still tell them about it.
Here are your next steps, once you have decided what you want to do:
If you want to claim the £1,000 Trading Allowance then read this to find out more about it and what records you need to keep.
If you have decided you want to register your side hustle as a business then read these posts for more information on registering and handling your own taxes:
- How to Register as Self-Employed in the UK
- Taxes and National Insurance When You Are Self-Employed
- How to Complete your own tax return
Anita is a Chartered Accountant with over a decade of experience taking self-employed business owners from financially confused to business savvy.
She is the creator of the ‘Go Self Employed’ website, which is her corner on the internet where she makes self-employment less terrifying.