Side hustles are a fantastic way to top up your income, but do you always need to pay tax on that extra cash? The answer is, not necessarily. The UK has a trading allowance that lets you earn a small amount from self-employed work without owing tax or having to declare it.

You also have a personal allowance, which applies across all sources of income. If your earnings go beyond these allowances, you’ll need to file a Self Assessment tax return. But no need to worry – with the right allowances in place, side hustle tax can be easy to manage, and our experts are always here to help.

Registering with HMRC as self-employed

If you’re earning extra income through a side hustle, it’s essential to register with HMRC as self-employed by the 5th October following the end of the tax year when you started. Registration is a key step in managing your side hustle tax obligations, and it can easily be completed on the HMRC website.

Missing the deadline could lead to penalties, which increase the longer registration is delayed. Additionally, failing to complete a Self Assessment tax return can result in further consequences, including additional fines. Registering and filing on time ensures your side hustle tax is properly managed and keeps everything above board.

National Insurance Contributions (NICs) for side hustlers

For anyone who has a side hustle in the UK, National Insurance Contributions (NICs) may be required depending on earnings. There are two main NIC classes for side hustlers: Class 2 and Class 4. Class 2 NICs apply when your self-employed income crosses a set threshold, while Class 4 NICs are owed on higher earnings.

These contributions count towards benefits like the State Pension, so it’s important to know your NIC responsibilities. Even if your side income is modest right now, understanding how NICs work will help as your side hustle grows.

How much tax will you pay on your side hustle?

Any income made from your side hustle is subject to income tax, with rates depending on your total earnings for the year. Here’s a breakdown of the tax bands:

  • Basic rate (20%): Income up to £50,270
  • Higher rate (40%): Income between £50,271 and £150,000
  • Additional rate (45%): Income over £150,000

It’s helpful to keep track of your total income, as your side hustle could push you into a higher tax bracket, impacting how much tax you pay on your earnings.

What expenses can you claim?

If you have a side hustle, you can lower your tax bill by claiming allowable expenses, effectively reducing your taxable income. Common expenses include:

  • Office supplies: Costs for items like stationery and equipment.
  • Travel expenses: Deductions for work-related travel, including mileage and public transport.
  • Marketing costs: Expenses for promoting your side hustle, such as advertising and website hosting.

It's important to keep accurate records and receipts for these expenses to back up your claims. By managing your expenses wisely, you can maximise your tax efficiency and enjoy more of the income you earn from your side hustle.

Tax reliefs and deductions for side hustlers

In addition to these expenses, you can further reduce your taxable income through specific reliefs like Business Mileage Relief for travel costs and the Home Office Allowance for running a home-based business. Keeping accurate records will help you optimise your tax deductions and keep more of your side hustle earnings.

VAT considerations for side hustles

If your side hustle’s turnover exceeds £85,000 in a year, you must register for VAT. This requirement applies regardless of whether your business is a full-time venture or just a side hustle.

Once registered, you’ll need to charge VAT on your sales and you can reclaim VAT on your business-related purchases. This means keeping detailed records of all transactions to ensure compliance. Failure to register on time can lead to penalties, so make sure that you monitor your turnover closely.

Tips for managing your side hustle finances

Managing your side hustle finances and tax can be straightforward with a few key strategies. Here are some quick tips to help you stay organised and compliant:

✔ Keep detailed records
Document all income and expenses related to your side hustle to simplify tax filing.

✔ Consider accounting software
Using software can streamline your financial tracking and reduce the likelihood of errors.

✔ Set aside funds for your tax bill
Regularly setting aside money for tax obligations ensures you’re prepared when it’s time to pay.

If you're venturing into online selling, be mindful of Etsy, Depop and Vinted tax obligations so you can stay compliant while maximising your earnings.

Let RIFT simplify your tax refunds

At RIFT, we understand that navigating your tax refunds can be challenging, especially with a side hustle. Our experts can help you with your claims and ensure you’re not paying more tax than necessary. We offer a handy self assessment tax return service to take the stress away from you.

Ready to find out how much money you might be owed? Get in touch with us today to see how we can help!