Whether you are making a little money on the side filling in surveys, or running an e-commerce website on top of your day job, you want to make sure you are considering the tax implications of the extra money your side hustle brings in.
That may sound a little daunting but it really doesn’t have to be. Here are 5 tips to making sure you stay on the right side of the taxman:
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1. Tell HMRC About Your Side Income
Do you need to tell HMRC about your extra income? Simply put, yes you do, if you make more than £1,000 from your side hustle then you need to let HMRC know. Anything under £1,000 falls under the trading income allowance that was brought in in 2017 and you don’t need to declare it. You need to be careful here, however, as it is £1,000 in income, not profit!
Once you reach that £1,000 threshold you will need to start filling in a self-assessment form to declare your side hustle income. This doesn’t have to be scary, and I walk you through it step by step in another article here.
It is your responsibility to tell HMRC about your extra income from your side hustle, and they don’t look very kindly if they find out you’ve not been honest with them.
2. Track Your Income and Expenses
Filling in your tax forms can be a bit daunting, but the simplest way of making sure it’s not a headache every year is to be a stickler when it comes to tracking your income and expenses. This is particularly important if you are also wanting to claim expenses back from the taxman as they will want to go through every receipt with a fine tooth comb. So, make sure you keep them all safe!
You should do this whether you earn over or below the £1,000 threshold and is a habit everyone should develop to help manage their finances better.
Tracking your income and expenses can be done very easily with a spreadsheet, and I have created a great template you can use here.
(Optional addition: There are also plenty of apps out there that can help you keep track of your income and expenses. Many will let you pull transaction information straight from your bank account, and let you take pictures of your receipts to add to the transaction, so you’ll never lose a receipt again.)
3. Open Up a Business Bank Account
If you are registered as self-employed, then opening up a business bank account is not a legal requirement, but it is recommended by HMRC and is an easy way to manage your income and expenses specifically tied to your side hustle.
There are some fantastic online-only business bank accounts available that are quick to set up and designed to make your financial life easier.
Starling and Monzo are two of my favourite online banks as they come with a fantastic array of extra functionality including taking pictures of receipts to add to transactions as well as automating and categorising expenses, to name a couple. They also let you create ‘pots’ for savings or, in this instance, for your taxes so you can always be sure you have put money aside for the taxman.
4. Get Your Tax Return in On Time
This should go without saying but you must get your tax return in on time. So, pay attention to when it is due and give yourself plenty of time to fill it in.
There are penalties starting at £100 for failing to get your tax return in on time. HMRC is very strict about enforcing their penalty system (forgetting or misunderstanding are generally not considered an excuse!).
5. Stay Organised
There’s no getting around having to manage your money and do your taxes, no matter what size of business your run, so you’re best to be as organised about it as you can be. Trust me, it will make your life so much easier in the long run.
You should set aside time regularly to go through your finances. If you can automate some of this process then even better, and there are accounting solutions like Xero and Quickbooks that help you manage your finances and organise your tax returns in one go.