During the first lockdown, many people set up a side business, often called a ‘side hustle’, to supplement their income after seeing their main income streams dry up. This was largely due to fears over job security and some people having more time to invest in other pursuits whilst furloughed. However, many are unaware that they may need to declare their secondary income to HM Revenue and Customs (HMRC) and pay taxes on it. Failure to meet these side hustle tax rules could lead to penalties further down the line, so with this in mind, we have written an overview to help you understand the rules.
Do side hustle tax rules apply to you?
Side hustles often stem from hobbies or interests and can take many different forms, from the sale of products, to offering new services. Examples include selling items through eBay, freelance writing or graphic design work, selling baked goods and dog walking.
Through the Pay As You Earn (PAYE) system, your Income Tax and National Insurance are automatically deducted from your salary by your employer. Side hustles generate non-PAYE income, which is money earned outside of a job where an employer deducts your tax. For non-PAYE income, it is your responsibility to manage your tax obligations.
If your gross income (before expenses) from the activity is £1,000 a year or less, you do not need to declare your earnings to HMRC or pay any tax on it. This is known as the trading allowance. There is also a property allowance of £1,000 for those who rent out rooms or homes.
What action is required?
Before taking any steps to build a side hustle, it is important to check whether your employer has a policy that allows this. In the current unusual situation it may be fine but when the pandemic is over, things may be viewed differently. Failure to check this may create issues further down the line, including disciplinary proceedings or even dismissal from the company.
If the gross income from your business totals more than £1,000 a year, then you must immediately notify HMRC by submitting a self-assessment tax return. You can do this online or by sending a paper form. Based on your self-assessment report, HMRC will calculate what tax you owe and send you a bill. The amount you pay will depend on which income tax band you fall into.
To ensure that you are able to fill in your tax return correctly, it is vital that you keep records, such as bank statements and receipts, from all of your activities.
The deadlines you need to know are as follows:
- Register for Self Assessment – 5th October 2021
- Paper tax returns – Midnight 31st October 2021
- Online tax returns – Midnight 31st January 2022
- Pay any tax you owe – Midnight 31st January 2022
The deadlines pertain to the tax year following that in which your activity began. As the current tax year began on 6th April 2020 and ends on 5th April 2021, we have shown dates that fall next year and beyond and apply to income from any products or services sold within the current year.
If you miss the deadline to send your self-assessment tax return or fail to make the payment, you will face penalties. For tax returns that miss the deadline by up to 3 months, the penalty is £100. If your tax return is more than 3 months late, or if you fail to pay your bill, the fee will be higher and you will also be charged interest on late payments.
How we can help
MCC Accountants specialise in assisting SMEs in Manchester and Salford with their accounting needs. Working through your side hustle tax rules can be a difficult and time-consuming process, but we are here to guide you through it, ensuring you are HMRC-compliant. If you would like more information, call us on 0161 707 1500 or get in touch using our contact page.