The number of people in the UK who have a ‘side hustle’ to supplement their income is growing. Research by Aviva estimates that one-fifth of the population has started a side hustle since the Covid pandemic, with a separate study by the Henley Business School suggesting one in four Brits have a side hustle.
Put simply, a side hustle is anything that generates additional income, whether a second job or hobby that brings in additional cash. Whilst many are small in scale, supplementing the household budget, collectively they are big business with the Henley Business School estimating side hustles contributing £72 billion a year to the UK economy.
Side hustles vary enormously, embrace all ages and include selling vintage clothes online, eBay trading, a cash-generating hobby such as baking or gardening, renting out a spare room on Airbnb or your driveway on JustPark, to babysitting.
Technology and flexible working patterns are making it easier to start a side hustle and earn additional cash. But HMRC will want its share. It is important to stay on the right side of the tax rules.
Everyone in the UK has a tax-free trading allowance of £1,000 a year over regular employment. If your side hustle generates less than £1,000 in any tax year no action is needed.
Once that side hustle takes off and earnings exceed £1,000, that income will need to be declared to HMRC via a self-assessment tax return and taxed as income. Individuals can easily find themselves pushed into a higher tax bracket paying more tax. It is an important consideration to keep in mind.
Tax to be paid can be reduced by deducting the cost of running that side hustle from profits. For example, the cost of ingredients to make a cake, any website costs to promote that business and even the fuel to deliver those cakes can be deducted.
There are more generous tax advantages to those who rent out a spare room, whether directly or via an online platform such as Airbnb. The Government’s Rent a Room scheme allows an individual to make up to £7,500 a year without paying tax, or £3,750 if shared with a partner. Rental income will need to be declared on a self-assessment tax return.
Those who take a second job and are paid through PAYE do not need to notify HRMC. The income from both jobs is automatically combined and taxes changed accordingly.
Time to register as a business
It is not uncommon for a side hustle to grow into a sizeable business, and when it does it may be appropriate to register the business as a limited company, particularly if income earned pushes you into the higher tax rates.
There is greater flexibility in how a director of a limited company can pay themselves, combining salary, dividends and even pension contributions. The tax a director of a business pays – and the business itself – will often be considerably less when compared to tax paid as income.
Additionally, a limited company provides directors with a greater degree of protection should the company fail. Directors will only lose what they have contributed to the company and will not be personally liable for the debts of the company.
A limited company does, however, come with additional compliance responsibilities and costs. In addition to a separate bank account, you will need an accountant to prepare the company’s annual accounts and corporation tax returns. In addition to potential PAYE schemes, directors will also be required to make tax returns if they take dividends.
As well as providing additional cash to supplement family income, a side hustle can open the door to a growing and successful business. It can be a daunting step to leave paid employment and ‘go it alone’ but your accountant can help support that journey.