Learning how to run a business can be overwhelming. New technical terms. Endless tasks to complete. And worst of all, getting your head around side hustle tax.
In reality side hustle tax isn’t that complicated, even when you have a job. Here, I’ll break it all down to help you understand what you need to be paying, doing and by when.
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.
Does Your Side Hustle Even Count as a Business?
“It’s just a little bit of money”
“It’s cash in hand so it doesn’t count”
“I don’t make enough money to pay tax”
The truth is that none of that matters. In most cases, side hustles are regarded as a business in the eyes of the tax man and are subject to the business tax rules.
It doesn’t matter if you only receive a small amount of money from things like gardening, Uber or doing surveys on your smartphone. In most cases, your side hustle earnings will fall into the category of untaxed income and you’re responsible for familiarising yourself with the tax rules, taking the right steps to let HMRC know about your earnings and paying tax if necessary.
How Do Side Hustle Taxes Work in the UK?
The way you’ll pay tax on your side hustle will depend on the business structure you choose for your business.
In the UK, the most popular business structures for side hustlers tend to be either sole trader or Limited Company, but other types do exist such as partnerships. The one that is right for you will depend on your own circumstances, level of earnings and how much paperwork you want to deal with.
Read this guide to find out more about whether a Limited Company is worth it for your business.
The easiest way to get started working for yourself is to register as self-employed. For the rest of this guide, I’ll assume that you are planning to choose self-employment as your preferred business structure.
When to Register Your Side Hustle as a Business
In the UK, you’re allowed to earn up to £1,000 tax-free in income (not profit) every tax year** before registering as self-employed.
**the tax year runs from 6 April to 5 April each year
Once your business income (the amount you get paid) goes over £1,000 you’ll need to register your side hustle with HMRC, let them know about how much money you’re making and pay tax depending on how much profit you make.
You don’t have to use the £1,000 trading income allowance, you can choose to register your side hustle as a business as soon as you get started.
Read this post for step-by-step guidance on registering as self-employed in the UK.
What is Self-Assessment?
Self-assessment is the process created by HMRC that allows anyone who receives untaxed income, like from a side hustle, to declare it to the government and pay any tax due. The way you’ll do that is by filling in a tax return form.
What is a Tax Return?
A tax return is a form issued by HMRC (also known as an SA100). It will appear in your HMRC online account when you’re registered for self-assessment.
The form contains lots of different sections and boxes that you need to fill in to declare your income. Once you’ve entered all your figures, HMRC will then calculate how much tax you owe ready for you to pay them.
You need to fill in your tax return by the 31 January each year summarising all your earnings for the previous tax year. So a tax return due by 31 January 2024 would contain your earnings between 6 April 2022 to 5 April 2023.
Save the link to this step-by-step guide to filling in your tax return to help get you through your first tax return
UK Tax for Side Hustlers
When you’re self-employed you’ll pay income tax, Class 2 and Class 4 national insurance on the profits from your side hustle.
Profit means all your income minus expenses you can claim as a tax deduction and you can learn more about tax deductions in this guide to claiming self-employed expenses.
Let’s look at each of these 3 types of tax in turn:
Income Tax For Side Hustlers
You’ll pay income tax on the taxable profits from your side hustle – the more you make, the more income tax you pay. But it’s on a sliding scale, so you’ll pay different rates depending on the portion of your profits that falls into each tax band.
Income tax starts at 20% on all your income (not just from your side business) over £12,570 and 40% over £50,270.
Here’s a summary of the sole trader tax rates:
Sole Trader Tax Rates
Tax Year 2023-24*
- 0%: £0 to £12,570 (personal allowance)
- 20%: £12,571 to £50,270 (basic rate)
- 40%: £50,271 to £100,000 (higher rate)
- 60%: £100,001 to £125,139 (higher rate + personal allowance restriction)
- Class 2 NI £3.45 per week on taxable profits over £6,725
- Class 4 NI 9% on taxable profits between £12,570 to £50,270 and 2% thereafter
* the tax year runs from 6 April to 5 April
Here’s an example:
You live in England, earning £40,000 gross salary from your job and £20,000 from your side hustle. The amount of income tax you pay is based on your combined income of £60,000 so you’ll pay income tax of £11,432.60 which is calculated as:
- 0% on the first £12,570
- 20% on the next £37,700
- 40% on the remaining £9,730
Your combined earnings mean that you are now paying the higher rate tax of 40%. You’ll most likely receive your personal allowance through your payslip.
Read this guide about tax when you’re employed and self employed to find out more about income tax and what you need to check on your payslip.
Class 2 and Class 4 National Insurance
As a sole trader, you’ll also pay National Insurance on your taxable business profits in addition to income tax. You won’t pay any Class 2 or Class 4 NICs if you earn up to the tax-free thresholds and it’s unrelated to any other income you have.
If you are employed in a job, you’ll still need to pay Class 1 NI on your employment earnings on your payslip. However, your employer will take responsibility for calculating your class 1 NICs for you.
Here’s an example:
Your taxable business profits are £40,000 for the tax year 2023-24. You’ll pay national insurance of £2,648.19 which is calculated as:
- Class 2 National Insurance £179.40
- Class 4 National Insurance £2,468.79
How You Pay Tax and National Insurance When You’re Self-Employed
You’ll need to file a tax return once a year declaring your taxable business profits. Your tax return is due by 31 January and you’ll need to declare information for the previous tax year.
For example, your tax return for the 2023-24 tax year is due for filing by 31 January 2025. So that gives you around 10 months to fill it in and submit it to HMRC.
In addition, you’ll need to pay any tax you owe (which HMRC will calculate from the information you enter on your form) along with your first payment on account by 31 January. You’ll then need to pay your second payment on account by 31 July.
Here’s an example:
You are self-employed for the tax year 2023-24, your taxable profits are £45,216 and you have no other forms of taxable income. Your tax bill is £9,647.18. Your tax deadlines are:
- File your tax return online by 31 January 2025
- Pay your tax bill of £9,647.18 by 31 January 2025
- Pay your first payment on account of £4,733.89 by 31 January 2025
- Pay your second payment on account of £4,733.89 by 31 July 2025
VAT for Side Hustle Business Owners
VAT (short for Value Added Tax) is a tax that consumers and non-VAT registered businesses pay in the UK. It is a tax added at a set percentage to the cost of certain types of goods and services. The three main percentage rates added are:
|Most goods and services such as adult clothes, furniture, alcoholic drinks
|Female sanitary items, children’s car seats and some energy-saving materials in the home
|Most food, coffee and children’s clothes
Here’s an example:
You want to buy a laptop from Apple which is advertised as £1,200 plus VAT. VAT is added at the standard rate of 20% meaning the amount you pay for the laptop is £1,440.
Businesses with a taxable turnover of £85,000 or more, must register for VAT. Once registered they must add VAT to the cost of the things they sell but also gain the ability to claim back VAT they have paid on business purchases.
A VAT registration is a separate registration to self-employment. If you are not registered for VAT you will have to pay VAT as though you are a consumer, even though you are making business purchases. Only VAT registered businesses can claim back any VAT they have paid because they have access to relevant forms.
The VAT rules are the same for businesses regardless of their business structure. So, whether you are a Limited Company, self-employed or in a partnership, you’ll be subject to the same VAT rules.
Read this guide to learn more about how VAT works and the benefits of early registration
In conclusion, side hustlers are subject to the same business tax rules as most other businesses. The easiest way to register your business is to go self-employed and take advantage of the £1,000 tax-free trading income allowance.
Once registered you’ll need to fill in a tax return once a year declaring your income and pay income tax, class 2 and class 4 national insurance on your business profits, depending on your income. Remember, as a side hustler, the amount of income tax you’ll pay is based on your combined earnings from your job and your side hustle. Read this guide to learn how to budget for your tax bill when you’re self-employed.