Those trading platforms such as Etsy, eBay or renting out a room through Airbnb should be especially aware. Starting January 2025, those platforms are required to report earnings information to HMRC on sellers that have sales that exceed a certain threshold. Only those who make a profit may be eligible for tax.
While HMRC's specific use of this data remains undisclosed, it is prudent for individuals running or embarking on a side hustle to anticipate tax requirements.
What is a side hustle?
It’s an activity that you do on the side of your day job to earn extra income. Numerous individuals in the UK earn income from various digital platforms:
- selling clothes through Shopify
- using spare time by driving for Deliveroo
- selling arts and crafts on social media or Etsy
- using Airbnb or similar sites to earn from holiday home rentals
- Using Bark or Upwork to offer writing, bookkeeping, dog walking and other services
Rules of side hustle tax in the UK
There are two allowances that you should be aware of before you start worrying about side hustle tax:
You can earn up to £1,000 in a tax year before expenses without worrying about taxes. However, surpassing this threshold means that you must be aware of your tax obligations and potentially submit a self-assessment to avoid HMRC scrutiny and penalties.
Rent a Room scheme allowance
If you rent out a furnished room in your home to a lodger through the government’s Rent a Room scheme – which can also apply to Airbnb landlords – the first £7,500 of rent each year is tax-free.
The tax exemption is automatic if you earn less than the above thresholds, meaning you don’t need to do anything - i.e. you don’t have to worry about registering as self-employed or declaring your income to HMRC.
When do I have to pay tax on my second income?
Side hustlers and landlords earning above the allowed thresholds should submit a self-assessment. Especially if your information has likely been shared with HMRC by a trading platform. It doesn’t necessarily mean that your income will be subject to tax. Only those making a profit may be impacted.
For example, say you rented a room through Airbnb at more than £8,000 a year, but the cost of refurbishing that room was £10,000. Airbnb may have to report your earnings, but if your allowable expenses exceed your earnings, there would be no tax for you to pay that year.
Everyone’s situation is different. If you have questions about your taxable income, it’s best to seek accountancy advice if possible or contact HMRC directly.
HMRC offers guidance on tax implications for selling goods and services online. If you are uncertain whether you should be declaring your earnings or if you engage in occasional personal item sales, use this HMRC questionnaire to determine if you need to report side hustle income.
For side hustlers frequently involved in online sales or other enterprises, there's a possibility of being categorised as a 'trader,' implying potential taxable income from the extra activities.
It’s therefore important to be organised about your side hustle tax affairs, even if it’s just making money from your hobby. Each side hustles come with its unique running costs. You can reduce your side hustle tax bill by claiming allowable expenses.
Depending on your side hustle, these expenses can include ingredients, materials, website costs, travel, use of home, equipment or fuel for your delivery vehicle. Ensure you keep all receipts of costs and sales. If you have to pay side hustle tax, you also want to be able to reduce any tax liability by legitimate expenses.
How to pay tax on second income
Those in full employment and no other income don’t need to worry about self assessment. The employer automatically deducts the tax from the salary.
However, having a side hustle that brings income over an allowable threshold a tax year means you’ll have to register with HMRC and complete a self-assessment tax return.
You’ll need to include employment details on your self-assessment tax return. Your salary and side hustle profit will be added together, which can push you into another tax bracket which means paying a higher tax rate.
You can submit a self-assessment yourself, but working out what you owe in taxes in addition to your salary may not be straightforward. The advice of an accountant might be needed so that you don’t end up paying too much.
How do I register side hustle tax in the UK?
Registering as a sole trader (i.e. not setting up a limited company) is very easy and can be done online in minutes.
HMRC will send you a Unique Taxpayer Reference (UTR) in the post within 10 days after registering. You’ll need this number to set up a government gateway account so that you can submit your tax returns online.
What happens if you don’t pay tax on second income?
If you get found out - for example, a platform such as eBay or Airbnb reports your earnings but you don’t submit a tax return - HMRC might fine you.
Late tax payments can accumulate interest and will be applied retrospectively if you have been running a side hustle for a while. The longer you avoid reporting tax on second income, the more you’ll owe.
Don’t let your side hustle cost you more than it earns
Business liability insurance is the last thing on side hustler’s mind when they start earning a second income. However, when you engage with customers, you’re exposed to liability claims.
Spare-time fitness trainers should absolutely consider fitness instructor insurance. Those who are selling products online must protect themselves with public and products liability insurance; renting a room is a great little earner, but without landlord's insurance, it’s risky. If you’re cooking books for others in your spare time, professional indemnity insurance for bookkeepers is prudent.