In an age where the “side hustle” has become a pervasive and often essential part of modern life, navigating the complexities of taxation can feel like an additional burden.
Whether you’re a budding entrepreneur selling handmade crafts, a freelancer offering your skills online, or a gig economy worker, understanding your tax obligations is crucial. For many years, the £1,000 tax-free trading allowance has been a familiar landmark for side hustlers. However, significant changes are on the horizon, with HMRC set to alter the Self Assessment reporting threshold.
Here at React Accountancy, we understand that these changes can be confusing and even a little daunting. With this in mind, we have made it our goal is to clarify these updates, explaining what they mean for your hard-earned side income and how you can stay compliant without unnecessary stress.
The shifting sands of side hustle taxation: What’s changing?
One of the most common pitfalls for side hustlers is confusing gross income with profit, and the trading allowance with the new reporting threshold. Let’s clarify:
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Gross Income: This is the total amount of money you receive from your side hustle before deducting any expenses.
Profit: This is your gross income minus your allowable business expenses. Tax is generally paid on your profit, not your gross income.
Trading Allowance (£1,000): This is a tax-free allowance. For example, if your total gross trading income is £1,000 or less in a tax year, you typically don’t need to declare it to HMRC, and it’s entirely tax-free. You also don’t need to register for Self Assessment for this income alone. If your gross income is over £1,000, you can still use the £1,000 trading allowance as a deduction instead of claiming actual expenses, if that is more beneficial.
Self Assessment Reporting Threshold (£3,000): This is the new threshold above which you must file a full Self Assessment tax return (assuming no other triggers for Self Assessment). For gross income between £1,000 and £3,000, you will still need to declare it and pay tax, but through a simplified online process, not a full Self Assessment.
What Constitutes a “Side Hustle” for Tax Purposes?
HMRC differentiates between selling personal possessions and engaging in a “trade” or “business.”
Selling Personal Possessions: If you’re simply having a clear-out and selling unwanted personal items (e.g: old clothes on Vinted, furniture on Facebook Marketplace) for less than you paid for them, this is generally not taxable. However, if individual items are sold for more than £6,000 profit, Capital Gains Tax might apply.
Trading/Business Activity: Your side hustle is likely considered a trading activity if you’re:
- Buying or making items with the intention of selling them for a profit.
- Providing a service (e.g, freelancing, tutoring, dog walking, delivery driving, content creation).
- Doing these activities regularly, with an intention to make a profit, and with a degree of organisation.
HMRC uses “Badges of Trade” to determine if an activity amounts to trading. If your activity fits the criteria, it’s a taxable side hustle.
Practical steps for side hustlers to stay compliant
Regardless of the new thresholds, good financial habits are your best defence against tax headaches.
Here are our top tips that should be on your radar.
Keep Meticulous Records: This is non-negotiable.
Income: Record every payment received, from all sources and platforms. Keep track of dates, amounts, and who paid you.
Expenses: Log all allowable business expenses. This includes platform fees, material costs, postage, advertising, software subscriptions, travel expenses, home office costs and professional development.
Bank Statements: Use a separate bank account for your side hustle income and expenses to simplify record-keeping.
Digital Tools: Consider using accounting software such as Xero or Sage or even a simple spreadsheet to track everything efficiently.
Understand Allowable Expenses: Only claim expenses that are “wholly and exclusively” for your side hustle. This reduces your taxable profit and therefore your tax bill. If in doubt, consult with an accountant.
Why choose React Accountancy?
At React Accountancy, we provide practical and value for money accounting services to our clients.
We have years of experience in the industry and are experts when it comes to dealing with Companies House and ensuring that our clients are fully compliant with the latest regulations.
We believe in providing a no jargon accounting service and have an open and honest relationship with our clients. Our accountants are dedicated to helping you make the most of your money.
From tradespeople to small businesses, and everything in between, we fully understand the complexities of accountancy and that’s why we offer a wide range of accounting services.
To find out more about how we can help, get in touch with the expert team today.
We provide our services across Manchester, Stockport, London, Birmingham, Cardiff, Bristol, Glasgow, Leeds, Nottingham, Leicester, Edinburgh, Sheffield, Bradford, Coventry, Liverpool and Belfast.
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