Side Hustles have proven to be an increasingly popular activity over the past few years. Unfortunately media reporting in some instances has caused confusion online about the tax treatment. Therefore, in this article we aim to provide you with some clarity as to how side hustles are taxed.
Overview
Whether you're selling on Vinted or walking dogs, you might wonder about how side hustles are taxed. Although, you will need to register with HMRC if your side-hustle amounts to running a business or trade and you are making a profit. We explain what that means below.
What is a side hustle?
A 'side-hustle' describes any part-time profitable activity above and beyond your normal employment. The aim from this activity is to produce some extra income.
Usually, a Side Hustle relates generating additional income from an online source. However, it describes any activity that generates money from selling off your old clothes or running an Airbnb, What's more, it can even relate to earning extra income from letting out you spare room.
There is nothing new has HMRC have previously been investigating eBay traders for a number of years.
When will I pay tax on my Side Hustle?
You only need to be concerned if your side-hustle operates like a trade plus you make a profit above your available tax allowances.
A side-hustle will potentially be classed as a trading activity, if any of the nine 'badges of trade' are evident. However the absence or presence of any particular 'badge' does not confirm the existence of a trade and HMRC view each case 'in the round' to determine whether or not someone is trading.
Nevertheless, you should consider the following key factors:
Typically, HMRC consider buying and reselling vintage clothes online, creating and selling handmade goods on Etsy or flipping children’s items from car boot sales as trading activities. Additionally renting out a room or listing on Airbnb will also be considered taxable. However this list is by no means exhaustive.
However HMRC are unlikely to tax you where, you sell your old clothes or furniture, clear out your garage or loft or offloading your children’s outgrown toys.
The tax treatment
If you are not trading, this may be because your side-hustle is just a hobby. There is no tax to pay if your side-hustle is a non-profitable hobby.
Conversely where your side-hustle just amounts to a hobby, you can't claim tax relief if you make a loss from your hobby.
To work out your profit or loss, take income earned and then deduct from that the cost of the item sold and any expenses paid enhancing it and selling it.
Alternatively, you can calculate your profit by claiming the £1,000 trading or property allowance against your income earned, instead of actual expenses. Although, you cannot use the trading or property allowance to claim a loss.
Reporting your Side Hustle to HMRC
If you are not filing a tax return under Self-Assessment, in strictness you have a duty to report your Side Hustle to HMRC.
Alternatively, if are already filing under Self Assessment you can report details of your side hustle on your tax return.
HMRC has various 'nudge letter' campaigns ongoing and back in 2023 it created one for online sellers, it continues to promote these campaigns.
HMRC already has numerous powers to obtain data on sellers' details from various sources. For example, online selling platforms, like eBay, Airbnb as well as from other places such as the Land Registry and Companies House.
What's more, if you’re based abroad but sell in the UK, HMRC shares data with your home country’s tax authority.
Summary
Side hustles are a great way to boost your income. But don’t get caught out by the tax rules. You should always consider whether your activity is just a hobby, you're making a profit and if you're regularly selling or providing services
When in doubt, play it safe. Register with HMRC and stay on top of your obligations. How side hustles are taxed isn't rocket science - although ignoring it can cost you dearly.
For more useful information, check out our Ebooks here
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
Alternatively, please feel free to complete our Business Questionnaire here.