Illustration by Gyöngyi Balogh
Has Covid got you rethinking your career path? 56% of Brits have started a side hustle alongside their main jobs during the pandemic, and now the side hustle economy is worth £346 million.
Side hustles can be a great way to earn some extra cash for life’s luxuries or to put towards your savings. But do you know how much of your extra income you can keep, and do you have to split it with the taxman?
If you got a great business idea but are confused with the tax part, read through this guide - we promise it’s not that hectic!
You don’t have to pay tax if you earned less than £1,000 in a tax year. Note that the £1,000 limit is for revenue, not profits. That’s why it's important to keep track of any money coming into your business!
If you make income from renting out a room in your houseyou may qualify for Rent a Room relief. Here you can earn up to £7,500 of rental income without getting taxed. Check out the terms and conditions for the Rent a Room scheme here.
If I make above that limit, what do I do?
Good question. You’ll need to register as a sole trader (aka self-employed) with the HMRC by October 5th of the next tax year since you started your business (the UK tax year starts on April 6 each year and ends on April 5 the following). This only takes a few minutes and can be done online.
As a sole trader you’ll have to:
For the 2021/22 tax year you’ll have to pay...
The basic difference is that if you’re a sole trader then there’s no legal separation between you and your business. You’re personally liable for all activities of the business, including debts.
If you form a limited company, your side hustle will be kept separated from your personal finances. However, you’ll have specific legal responsibilities to fulfill as a director of the company. This also has a number of tax implications.
You should register first as a sole trader since it's easier to set up and the accounting process is simpler.
When your earnings start to pick up, you can consider moving to a limited company format and save money on tax. It is calculated that people start benefiting from registering as a limited company once their profits reach about £30,000 per year.
Sign up to Quirky Fridays for a round-up of the week’s most important news on the economy and tips that will help with your personal finances. Every Friday at 4PM straight to your inbox.