Unsurprisingly, many people are currently turning to side hustles to help them pay their bills. From selling unwanted clothes to working an extra part-time job, many supplement their income however they can to get through the cost of living crisis and still work to achieve their financial goals. However, many people also aren’t aware of the rules around side hustles involving paying taxes, registering as self-employed, and how much money you can make. So, hopefully, we can help you understand the basics if you’re just starting with a side hustle. 

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How You Are Taxed

The most important thing to know when starting a side hustle is what you must make before paying tax on those earnings. The tax-free trading allowance in the UK is £1000 in additional income - so if you are employed full-time and earning more than that threshold from your side hustle, you will need to pay tax. This means that it’s essential to keep track of income when you first start earning to know whether you will meet this threshold. If you make over this, you must register as self-employed with HMRC and then submit a self-assessment tax return. 

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If you are employed, you will know that when you get paid, tax is already deducted (PAYE). When self-employed, you need to submit a self-assessment tax return to ensure that tax gets paid. The process of registering as self-employed with HMRC is straightforward. You need some personal information as well as business information to get started, and then once that form is submitted, you have to wait to hear from HMRC. You need to register with HMRC by the 5th of October after the end of the tax year when you became self-employed.

For example, if you became self-employed in July 2022, you must register with HMRC by 5 October 2023. If you register late, you may be penalised. 

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Filing a Tax Return

You will then be sent a Unique Taxpayer Reference (UTR) that you must use when submitting your tax return, so be sure to keep this code handy. The deadline for submitting this only is the 31st of January, but you don’t have to leave it until the last minute! For this part, you will need quite a bit more information, including your UTR, National Insurance number, details of the income you received from your side hustle, information on any related expenses and records showing how much income tax you have already paid for that tax year from other employment. 

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It can be daunting at first, but it’s not as scary as it looks! As long as you have kept records of the information you need, it can be a relatively pain-free process. Keeping track of your income and expenses is crucial for accurate tax reporting. Another tip is to put aside some of your side hustle income each month to prepare for when you have to pay those taxes.