Having an entrepreneurial spirit is a wonderful thing. And whether you have to find some supplemental income to help with the rising cost of living or you’ve found a post-pandemic hobby that’s starting to take off faster than you expected, there’s nothing wrong with having a little side gig that you choose to do alongside your full-time job.
For some people, having a side hustle can be a way of pursuing a passion that helps to break up the monotony of a 9-5 job, or perhaps it’s the first step toward becoming their own boss and creating a successful career. Either way, sometimes the rewards of a side gig go beyond the money received and provide a sense of pride and satisfaction because your specific skillset is in demand and making you some extra pocket money in the process.
But when that pocket money begins to increase, there’s the potential for people to unintentionally neglect their responsibility to declare the amount they make from a side gig, which can result in unexpected issues and potentially even hefty fines from HMRC.
What exactly is a side gig?
A side gig (also commonly known as a side hustle) is a job that you’re able to conduct alongside your standard full-time job. Essentially, it’s being a freelancer in a niche that pays you a little extra income outside of your main job.
While there are several reasons why someone may choose to have a side gig, people predominantly do it to pursue a creative passion or help cover their bills.
The following are all examples of a side gig that may bring in additional income:
● Freelancing as a photographer, copywriter, designer, etc
● Having your own online store that sells items you’ve made
● Streaming on platforms like Twitch for some extra money
● Tutoring others privately with music/maths/literacy lessons
● Babysitting and dog walking in exchange for money
Should I be paying taxes on my side gig?
In a standard full-time job, your taxes are calculated and collected from your salary before you receive your payslip. This is an easy and straightforward way of paying income tax and National Insurance, as you don’t have to do anything on your side to ensure it’s paid correctly.
However, for side gigs, you’ll be the sole person responsible for making those tax payments. And unless your earnings are under the allocated HMRC tax-free allowance threshold, you’re expected to declare that income.
What is the tax-free allowance?
Every resident of the UK is entitled to an additional £1,000 of income that is gained outside of their regular job. In other words, if you’ve got a side gig that has brought in less than £1,000 within a tax year, then you won’t have to declare it to HMRC.
What if my side gig brings in more than the tax-free allowance?
If your side hustle has earned you over the £1,000 limit of tax-free allowance, you’re legally obliged to inform the HMRC and submit a self assessment tax return. HMRC has to be made aware of any income over this amount because your side job isn’t taxed and needs to be officially submitted.
Failing to make HMRC aware of your side gig income will result in future issues with the government that can range from significant fines, hefty late payment penalties, and additional charges that may end up costing you more than what the original tax bill would have been for your side gig’s earnings.
For these reasons and more, it’s vital to submit a Self Assessment tax return if you’ve earned over £1,000 from your side job.
What is Self Assessment?
Self Assessment is a method that HMRC uses to collect taxes from freelancers, businesses, and anyone with a side gig that brings in additional income. Individuals who conduct side gigs and earn above the tax-free allowance threshold are legally required to conduct a Self Assessment tax return.
If you need to send a Self Assessment tax return to HMRC, you’ll have to do so after the end of the tax year (5th April) the assessment is in relation to. To submit a comprehensive Self Assessment, it’s best to keep detailed copies of the following documents:
● Any invoices from your side gig
● Bank statements from the tax year in question
● Receipts confirming payments
● Receipts that pertain to any expenses you’re claiming back
HMRC will then calculate a tax bill for you with the above considerations. It’s also important to know that while the government’s initiatives to digitalise tax assessments may have sped up processes and procedures, you should aim to submit a digital Self Assessment within up to 20 working days before the deadline if this is your first online submission.
For future submissions, it’s always best to keep up to date with Making Tax Digital initiatives to ensure you’re benefiting from a more streamlined process for your Self Assessments.
What are allowable expenses?
While a percentage of your side gig is always going to be subject to taxation, you’re within your rights to deduct some of the money you spend on your business, as this isn’t strictly defined as a profit from HMRC’s point of view. This is known as claiming for expenses.
Claiming back allowable expenses can reduce the amount of tax you owe to HMRC. Some of the following costs can be claimed back as allowable expenses:
● Travel costs like train fares and petrol
● Office costs like stationery and other supplies
● Heating, lighting, and other business premises costs
● Insurance costs relating to your business
● Clothing expenses like safety gear or uniforms
● Training courses that pertain to your business
Depending on what your earnings are, these expenses can add up significantly, saving you money and making a potentially big difference in the overall tax you pay each year.
Am I a Sole Trader or a Limited Company?
When registering with HMRC, you’ll have to choose whether you want to be listed as a sole trader or a limited company.
As a sole trader, filing tax returns is relatively straightforward. Sole traders tend to be individuals who are happily running a smaller-scale side gig that’s a business but also a passion or hobby. Sole traders don’t pay corporation tax, and income tax will be charged at a basic rate of 20%, a higher rate of 40%, or a top rate of 45% depending on the annual income you bring in.
As a limited company, you have the chance to nominate shareholders. However, your business is also then answerable to those same shareholders, and you’ll be expected to keep detailed records and accounts of all transitions and finances. You’ll also need to register your business with Companies House, and your business will be subject to Corporation Tax.
Managing your accounts
Keeping track of the income from your side hustles is your responsibility, whether you’re employed or self-employed. Earnings all need to be recorded and kept for a period of no less than 5 years from the 31st of January following the tax year for which the tax return is made.
It can be beneficial to hire a professional for this job as they can check your company (or sole trader business income) is operating within the law and any specific guidelines. Accountancy organisation benefits might include saving you time, reducing tax liability, helping you grow your business and removing any tax worries you might have.
The specific amount of income tax and National Insurance you’ll end up paying ultimately depends on how much money your side gig brings in, how much you earn in your full-time job, and more. But as long as you’re staying on top of the fundamentals like completing your Self Assessments accurately, you’ll be setting your side gig up the right way, and avoiding any unexpected issues with HMRC in the process.
When you’re working two jobs at once to make your goals a reality, the last thing you need is more stress, confusion, and potential fines coming your way. Putting the above information into action can help you keep your side gig exciting, fun, and financially secure.